The May consumer price inflation report, released just before the Federal Reserve’s policy meeting last week, was “bad news” and justified the central bank raising its benchmark rate by 0.75 percentage points, the largest increase since 1994, said Charles Evans, the president of the Chicago Fed, on Wednesday.
The May CPI data showed overall inflation accelerated and that core inflation remained quite high, Evans said. Prices for goods excluding food and energy rose strongly in May and that was the category where easing supply-chain pressures would show up first, Evans said.
In addition, rent experienced a large increase in May. Inflation in this area tends to be “fairly persistent.”
“This was quite disappointing,” Evans said. And it came on the same day there was a “worrisome” upside surprise in long-run household inflation expectations in a survey by the University of Michigan.
“This bad news on inflation was an important consideration for my supporting a 75 basis point hike in the federal funds rate instead of the 50 basis point increase we had signaled earlier,” Evans said.
Evans said he backs raising the fed fund rate target to a range of 3.25% – 3.5% this year and 3.8% by the end of 2023.
This path for interest rates “should have a modestly restrictive influence on the economy,” he said.
The Chicago Fed President, who is retiring in January, said he expects inflation “will cool substantially over the next couple of years.”
But there is a greater chance of higher inflation than an easing of price pressures, he added.
U.S. stocks DJIA, +0.04% SPX, +0.26% were higher in early afternoon trading. The yield on the 10-year Treasury note TMUBMUSD10Y, 3.156% fell sharply to 3.16%.