Fed to raise interest rates to 4% next year, Evans says

By Ann Sapphire
(Reuters) - Wednesday's CPI report, which showed US inflation did not accelerate in July, was the first "positive" read for price pressures since the Federal Reserve began tightening policy, the president said of the Chicago Fed, Charles Evans, although he signaled that he believes that the Fed still has work to do.
With consumer prices unchanged from June last month but up 8.5% yoy, inflation is still "unacceptably" high and the Fed is likely to raise interest rates, which currently range between 2.25% and 2.5% will need to rise to 3.25%-3.5% this year and to 3.75%-4% by the end of next year, Evans said.
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The comments suggest that Evans, one of the 19 central bankers who have set US monetary policy, expects the Fed's steepest round of rate hikes in decades to slow soon. Although he didn't specifically say whether he would support a cut as early as next month, the Fed would need to raise rates by just one percentage point over the next four months to meet its projected year-end rate.
That would be half the rate hikes of the past four months.
At the same time, his expectation that rates will rise at 4% next year suggests he is more hawkish than financial markets, which are pricing in a top Fed funds rate of 3.75% to be reached in mid-2023 , followed by rate cuts.
"I feel like we're in a good place and can tighten up if inflation is getting more out of control than I think it is," Evans said at an event at Drake University in Des Moines, Iowa. "But even if things are improving faster, we may not be raising rates quite as much as I just implied... I think we're well-positioned now for a few different twists in the data over the next few months."
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Evans said he expects inflation to be closer to 2.5% next year as measured by the Fed's preferred metric, the personal consumption expenditure price index, although it's still above the Fed's 2% inflation target.
Since March, the Fed has raised interest rates by 2.25 percentage points, including two consecutive hikes of three-quarters of a point each at its June and July meetings.
A report last week showing that employers added more than half a million jobs in July - far more than expected - fueled market expectations for a third consecutive 75 basis point hike in September, amid possible renewed inflationary pressures counteract a tight labor market.
After Wednesday's CPI report showed inflation decelerating instead, traders switched to betting on a half-point hike for September.
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Evans said on Wednesday he doesn't think the latest jobs report necessarily points to more inflation, "but we need more data on that".
And he'll get it: The Fed will have another monthly reading on the US jobs market and several different inflation measures ahead of its September meeting.
(Reporting by Ann Saphir, editing by Jonathan Oatis and Mark Potter)

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