Fed likely to need to hike rates 'a bit beyond neutral' - Evans

By Lindsay Dunsmuir

(Reuters) - The Federal Reserve will likely have to raise interest rates past the neutral rate to keep the economy on a sustainable growth path and inflation around target, according to Chicago Federal Reserve Bank President Charles Evans.

"Given the outlook today, I believe this will entail moving policy first toward a neutral setting and then likely a bit beyond neutral," Evans said in a speech originally intended to be delivered to a conference earlier this week in Argentina and released on Thursday.

Evans does not have a vote on the central bank's rate-setting committee this year but fully participates in deliberations.

The neutral rate is a level of interest that is seen as neither encouraging nor discouraging economic decisions, and is consistent with both stable inflation and strong employment.

Fed Chairman Jerome Powell said in a speech two weeks ago that gradual rate rises in the current environment of strengthening growth and low unemployment were healthy for the U.S. economy.

Fed policymakers differ on where they see the neutral rate of interest with current estimates ranging from 2.0 to 3.5 percent. Evans sees the neutral rate at 2.75 percent.

Investors expect the Fed to raise its benchmark interest rate by a quarter percentage point to a target range of between 2 and 2.25 percent at its next policy meeting on Sept. 25-26 and see another rate rise in December.

In the prepared remarks, Evans said the central bank would have to tighten more quickly should inflation move "unacceptably" higher than the Fed's symmetric 2 percent objective.

Inflation has hit that Fed target in recent months after more than six years of undershooting.

Conversely, should uncertainty over trade caused by the Trump administration's policies continue or there is a stalling of inflation expectations the Fed would need to raise rates more slowly, Evans said.

The central bank has already raised rates twice this year and seven times in total since it began a tightening cycle in late 2015.

Nevertheless, a lower neutral rate of interest than in past decades will make any downturn in the future more difficult for the central bank to handle, Evans noted.

"Monetary policy will have less headroom to provide adequate rate cuts when large disinflationary shocks hit the economy," Evans said.

(Reporting by Lindsay Dunsmuir; Editing by Phil Berlowitz and Tom Brown)