The Federal Reserve may need to raise interest rates to “somewhat restrictive” levels to combat the effects of recent fiscal stimulus on the U.S. economy, said Chicago Fed President Charles Evans in hawkish comments from one of the central bank’s most reliable doves.

“If inflation continues to be on the order of 2, 2.2 (percent) -- I’m not expecting it to get as high as 2.5 -- that suggests only a modest amount of restrictiveness above our neutral rate might be called for in 2020,” Evans told reporters Thursday in Chicago.

The Fed under Chairman Jerome Powell has raised rates twice this year and penciled in two more moves in 2018, with investors widely expecting officials to act at their next meeting on Sept. 25-26.

Policy makers have also signaled they expect to raise rates into slightly restrictive territory -- above the “neutral” rate would neither speed up nor slow down economic growth -- though some officials prefer to pause the hiking campaign when rates reach that point.

Evans, who has long been considered one of the most dovish officials at the U.S. central bank, said “it would not surprise me at all if we make a judgment to move to a somewhat restrictive setting,” citing roughly half a percentage point above his 2.75 percent estimate of neutral.

The tone of his comments mark a shift in his thinking. As recently as December, Evans dissented against rate increases on the grounds that inflation expectations were too low and may prevent inflation from rising to the Fed’s 2 percent target.

Now, given the boost to economic growth that tax cuts and federal spending increases passed by U.S. President Donald Trump and the Republican-controlled Congress are expected to bring, he is more confident in the inflation outlook. A U.S. inflation gauge watched closely by central bankers, based on the prices of personal consumption expenditures excluding food and energy, was 1.9 percent in June, up from 1.6 percent a year earlier.

“I do think that the underlying inflation expectations that sort of underpin the current inflationary environment are a little bit lower than I would like to see,” Evans said. “Given the data -- economy being strong -- I think inflation expectations are going to catch up.”

Natural Rate

Evans sees a need for restrictive interest-rate policy in the coming years because he expects unemployment to fall to around 3.5 percent by the end of 2020. It was 3.9 percent in July. The Chicago Fed’s estimate of the so-called natural rate of unemployment -- the rate that policy makers believe would be sustainable in the long run without causing inflation to rise -- is 4.3 percent.

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