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Chicago Fed President Charles Evans said that rising interest rates at the short-end of the curve could be a problem if it meant that investors doubted the Fed's commitment to get inflation higher.
Evans said he wanted investors to know he wouldn't get nervous about inflation until it moved above 2% annual rate.
"You know, 2.5% inflation - that doesn't worry me. And 3%, let me see what 3% is," Evans said In a discussion sponsored by the CFA Society of Chicago.
"If 3% is on the way to 4%, that would be a huge problem. Is 3% just up to 3% and then it is going is starting to come down, that is not such a problem," Evans said.
Evans said the rise in the 10-year Treasury note was a healthy rise. However, he said rising yields at the short-end of the curve needed to be explored and was a potential concern.
Last week, yields on 5-year Treasurys surged up during turmoil in the overall markets, at one point, marking the sharpest daily yield rise since 2010.
The Fed has said it won't raise rates until the labor market has recovered fully and inflation is close to 2% target.
"If they think we're not going to live up to that and raise rates sooner, that creates a problem," Evans said.
"You never want to lose your credibility that you are going to deliver on your inflation objective," Evans said. "If markets question that, if they start thinking your objective is a ceiling, and once you get up to it you're going to get really nervous - that is a problem," he added,
A lesson from foreign central banks is if they get nervous about low interest rates too early they don't get inflation up, the Chicago Fed president said.
Evans said he doesn't expect to have to make monetary policy more accommodative by adjusting its bond purchase program to focus on the longer-dated maturities, such as the 10-year Treasury and the 30-year
The Fed is buying $80 billion a month of Treasurys across the curve along with $40 billion of mortgage-backed securities. The central bank has said it would continue these purchases until it made significant progress in its goals of a healthy labor market and higher inflation.
"At the moment, the rebound I'm expecting is really quite a strong one," Evans said, and the stimulus program under debate in the Senate "would be very strong."
As a result, "I would not expect we would have to change the duration aspect of these purchases," Evans said.