In a speech on Monday, Chicago Fed President Evans stated that the setting for monetary policy had improved and that the economy is on a pretty good course right now.
Earlier in the day, Evans stated that the Fed is on track to raise interest rates twice more this year and it could be more or less aggressive depending on inflation and fiscal policies from the Trump Administration.
If inflation picked up, that would solidify expectations of a total of three rate hikes and, according to Evans, it could be four times if things really pick up.
Ahead of the March meeting, Evans had stated that he expected two rate increases for 2017 and that three hikes were a possibility. At that stage, there was no mention of four rate increases and the overall language on rate increases this time around was slightly more hawkish.
Evans also stated that the Fed would decide in June whether to hike rates which appears to rule out any move at the May meeting.
He also commented that the 4% GDP growth target of the new Administration would really be an outsized number.
As far as inflation is concerned, he stated that there is room to get inflation up to 2% and, in fact, a little beyond 2% to make sure we get there. According to Evans it’s an asymmetric inflation target which makes it OK to have inflation slightly above 2%.
The comments will maintain expectations that the FOMC is content with a period of inflation above 2% as part of an important element of the medium-term target, especially as the symmetric target was inserted into the March FOMC statement.
Although Evans is traditionally on the dovish end of the FOMC spectrum, the comments will fuel speculation that the FOMC is looking to push market sentiment towards expecting inflation rates above 2% for several months at least. This rhetoric will tend to put downward pressure on real interest rate expectations which will limit dollar support.
Market reaction was limited with Treasuries maintaining a firm tone as the 10-year yield dipped to below 2.48%. EUR/USD drifted to session lows near 1.0730, although USD/JPY tested support near 112.50 as equities dipped lower.