Chicago Fed President Charles Evans he didn’t see an “outsized risk of a breakout in inflation”. And as long as that picture continues Fed can “increase rates gradually while monitoring any rising inflationary pressures.”
Evans was indeed referring to the risk of 70s style overheating in inflation, as central banks fell behind the curve. And Fed was forced to push up interest rates aggressively in response, which ensued a recession.
But this time, he didn’t expect inflation to pick up as quickly or as problematically as it did in the 70s. And therefore, “the federal funds rate does not need to be increased as much above its neutral setting as in the past when trend inflation needed to be taken down several notches.” And, “gradual policy increases in this context make sense—certainly as a way to limit the damage if policy ever actually becomes overly tight too soon.”
