By Laurie Laird
FRANKFURT (MaceNews) – U.S. interest rates currently reflect the “fundamental” resilience of the economy, according to an influential Federal Reserve policy maker, in line with the latest outlook provided by the central bank, suggesting a holding pattern for monetary policy.
“The setting of the funds rate at the moment is appropriate for the U.S. economy,” said Chicago Fed President Charles Evans, a voting member of the Federal Open Market Committee, speaking to a small group of journalists in Frankfurt. “We’re pretty well positioned given the two 25-basis-point cuts we’ve made.”
But in an address earlier on Tuesday at the Hesse branch of the Bundesbank, Evans told his audience that “disappointing inflation developments this year suggest more work is needed.” The “ebb and flow of trade tensions” have led to “delayed or even cancelled investment projects” in his mid-west constituency. Falling inflation expectations “require us to cut 50 to 75 basis points below the long-term neutral [Federal Funds] rate, he said.
However, in comments to journalists, Evans predicted that, even in the absence of further cuts, inflation is likely to overshoot the Fed’s 2% annual target by 2021. “I think we’ll have an inflation overshoot” by the end of our forecast period. He also called for “aggressive accommodation” to boost inflation expectations, expressing support for a rise in inflation to an annual rate of 2.5%, so that price rises could “average 2% over a longer period.”
Evans appeared nonplussed about the direct risk of tariffs on the U.S. economy, pointing to models suggesting a 0.2% hit to economic growth this year. He did express concern about the resultant uncertainty, particularly to businesses facing potential disruption to supply chains.
He also downplayed a recent run of poor manufacturing data, not least the contraction implied by the Chicago Purchasing Managers’ Index, which fell to 47.1 in September from 50.4 in August. “The purchasing managers’ data is always interesting; It comes out first … but there is no single data release” that over-influences the Federal Open Market Committee’s decision making.
It was “a collection of data” that led to rate cuts in September and July, Evans said. “Business spending has been weak. Capital spending has been negative … [the July rate cut] was supposed to give rise to stronger business spending. Trade uncertainty has been adding to reticence on the part of business,” he said.
While Evans referred to the September cut as a “sensitive readjustment to monetary policy,” largely reiterating the comments of Chairman Jerome Powell, he did acknowledge a “bi-modal view” among FOMC members … some of whom “think we should be doing more risk management by cutting rates.”
— Courtesy of MT Newswires