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The Federal Reserve doesn't understand what's happening to a key economic model, Fed's Charles Evans says

  • "We don't have a great understanding of why it's gotten to be so flat," Evans said about the so-called Phillips curve
  • It is the Fed's main aim to stabilize prices at an inflation rate of about 2 percent

There's one key economic model that the Federal Reserve has struggled to understand, Charles Evans, the president of the Federal Reserve Bank of Chicago, told CNBC on Wednesday.

"We don't have a great understanding of why it's gotten to be so flat," Evans said about the so-called Phillips curve.

This model states that as the unemployment rate decreases, inflation should pick up with more people in work. However, despite decreases in the U.S. unemployment rate, which currently stands at about 4 percent, the inflation rate has kept falling since the start of the year.

It is the Fed's main aim to stabilize prices at an inflation rate of about 2 percent. Recent data suggest that core inflation, which excludes food and energy, stood at 1.3 percent in September. At the start of the year, inflation was at 1.9 percent.

Charles Evans, president and CEO of the Federal Reserve Bank of Chicago.
David Orrell | CNBC
Charles Evans, president and CEO of the Federal Reserve Bank of Chicago.

"So it's hard to really speculate and theorize as to why it might all of the sudden steepen, now as the unemployment rate continues to go lower … surely wage pressure should re-emerge," Evans said.

A steepening Phillips Curve would suggest that wage growth is rising, while a flat curve would highlight an economy that has little inflation but low unemployment.

Evans added that he is not worried in case there is a sudden pickup in inflation.

"I also take great heart from the fact that if we get inflation we know how to deal with inflation," he said. "We increase interest rates."

Evans, who believes that the actual expectations regarding inflation is one of the factors driving inflation itself lower, said that the Fed should reinforce its commitment to bring inflation to 2 percent.

"It's a challenge for monetary policy to communicate that our inflation objective is 2 percent," he said. But communicating it and thus raising sentiment surrounding inflation "would help us to get to 2 percent on inflation itself."