The US Federal Reserve might have to put interest-rate increases on hold or even ease monetary policy if economic forecasts for this year disappoint, Chicago Fed President Charles Evans 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 central bank’s rate-setting Federal Open Market Committee (FOMC) surprised investors on Wednesday last week 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 this year. The pivot followed a three-year campaign in which policymakers raised their benchmark overnight policy rate from near zero to just under 2.5 percent.
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Fed Chairman Jerome Powell cited downgraded estimates for economic growth during his post-FOMC meeting news conference, in part due to a slowdown overseas. Evans echoed that outlook, saying that he expects US growth to slow to a 1.75 to 2 percent pace this year, following a 3.1 percent expansion last year.
“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 with last year’s very strong performance.”
If growth meets expectations, further tightening would depend on faster inflation, Evans said.
A closely watched gauge of US price pressures rose above the Fed’s 2 percent target last summer for the first time since 2012, but has since moderated to levels just below 2 percent.
“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 percent target,” Evans said.
“In this scenario, the path for rates will depend crucially on any signals of an acceleration in core inflation,” Evans added.
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