Evans says Fed may have to ease if downside risks take hold

NEW YORK • The US Federal Reserve (Fed) may have to put interest-rate increases on hold or even ease monetary policy if economic forecasts for 2019 disappoint, Chicago Fed president Charles Evans (picture) said.

“At the moment, the risks from the downside scenarios loom larger than those from the upside ones,” Evans said in remarks prepared for a speech yesterday in Hong Kong. “If activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold — or perhaps even loosened — to provide the appropriate accommodation to obtain our objectives.”

The US central bank’s rate-setting Federal Open Market Committee (FOMC) surprised investors on March 20 by bringing down its projections for further tightening.

Eleven of the 17 FOMC officials expected it would be appropriate to leave rates unchanged for all of 2019.

The pivot followed a three year campaign in which policymakers raised their benchmark overnight policy rate from near zero to just under 2.5%.

Fed chairman Jerome Powell cited downgraded estimates for economic growth during his post-FOMC meeting press conference, in part due to a slowdown overseas.

Evans echoed that outlook, saying he expects US growth to slow to a 1.75% to 2% pace in 2019 following a 3.1% expansion in 2018.

“The lower end of this range is actually in line with my view of the economy’s long-run growth potential. So, we’re not looking at a bad number,” Evans said. “Still, the economy won’t feel like it is doing very well compared to last year’s very strong performance.”

In an interview with Bloomberg TV in Hong Kong, Evans said he’s forecasting policy will be on hold until the fall of 2020.

Inflation close to 2% is “good but I’m worried that it still takes accommodation to keep inflation at that level, and so I actually marked down my path for policy rate increases”.

In his speech yesterday, the Chicago Fed chief said if economic growth meets expectations, further tightening would depend on faster inflation.

A closely-watched gauge of US price pressures rose above the Fed’s 2% target last summer for the first time since 2012, but has since moderated to levels just below 2%.

“If growth runs close to its potential and inflation builds momentum, then some further rate increases may be appropriate over time to ensure that the economy settles in on its long-run sustainable growth path and that inflation runs symmetrically about our 2% target” Evans said.

“In this scenario, the path for rates will depend crucially on any signals of an acceleration in core inflation.”

Bond markets have started to signal worries about global growth and a possible US recession, with yields dropping to multi-year lows and the spread between yields on three-month US bills and 10-year notes inverting for the first time since 2007.

In a question-and-answer session after his speech, Evans said there are a lot of “miscues” about modest yield curve developments. While the flatter yield curve is something to be mindful of, US economic fundamentals remain strong and the risk of a negative shock hitting the economy is not “unusually higher or lower at the moment”, he said.

At an earlier panel discussion yesterday, Evans said the Federal Funds rate was close to neutral and it was a good time to be “cautious” given global risks and US fiscal stimulus waning.

“I am not worried about inflationary pressures increasing,” he said. “If anything, I am worried they are not going to increase more.” — Bloomberg