By Anthony Harrup and Michael S. Derby 

MEXICO CITY -- Chicago Fed President Charles Evans said Thursday that the U.S. central bank is closely monitoring the fallout from the spread of the coronavirus, but would look for an impact on the economy before thinking of a monetary policy response.

That could take time, as the evolution of the epidemic is still uncertain, he said at an event in Mexico City. Despite the recent market selloff driven by fears about the effects the coronavirus could have on economic growth, it is too early to think of reducing U.S. growth forecasts, Mr. Evans said.

Still, a monetary policy response wouldn't be ruled out if a need were seen.

"We're monitoring very closely and if we see something that does require an adjustment, I'm confident we would give that all the consideration it needs," he told reporters after a speech.

Mr. Evans was a voting member of the rate-setting Federal Open Market Committee last year, but he doesn't have a vote this year due to the annual rotation of regional bank presidents. In 2019, the Fed lowered rates three times to offset risks to an otherwise healthy U.S. economy from trade policy uncertainty and slowing global growth.

Mr. Evans said he felt comfortable that last year's three cuts in the federal-funds rate to the current range of between 1.50% and 1.75% had positioned monetary policy for additional risks.

In its forecasts from December, most Fed officials said they expected to keep rates steady for the year. But the coronavirus situation, which has already caused upheaval in China's economy and is now spreading beyond that nation's borders, is raising worries about the U.S. outlook. Financial markets have booked big losses and futures markets now predict the Fed will lower rates at its March meeting, and cut again as the year moves forward.

So far, no Fed officials have joined with the market outlook. Those who have spoken have acknowledged the fluid and uncertain nature of events and have said they are watching the data for signs of how to react.

In his formal remarks, Mr. Evans said the Fed may need to let inflation overshoot its 2% target in the future as part of an effort to ensure price pressures aren't too weak and monetary policy doesn't get stuck at near zero rates.

Mr. Evans also said that because the risks of falling to near zero rates are now higher, the Fed must be prepared to use stimulus tools like bond buying and guidance about the future of interest rates when needed.

Mr. Evans's presentation was largely a review of current thinking about how the Fed can achieve its 2% target, something it has failed to do with any consistency since adopting it in 2012. At the same time, changes in the financial system and economy have led to a lower level of short-term rates, which has further complicated the Fed's ability to help influence the economy and achieve its inflation target.

Mr. Evans noted that the Fed's inflation shortfall is dramatic. He said that the trend of price increases is 5.3% below where it should be had that trend risen by 2% since 2007, when the financial crisis began. If the Fed wanted to get the price trend back to where it should be, average inflation would need to rise to 4.7% for two years. To get the price level back to trend in six years, it would require average inflation of 2.9%.

Write to Anthony Harrup at anthony.harrup@wsj.com and Michael S. Derby at michael.derby@wsj.com

 

(END) Dow Jones Newswires

February 27, 2020 15:10 ET (20:10 GMT)

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