The Federal Reserve 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 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 on Monday 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 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 policy makers raised their benchmark overnight policy rate from near zero to just under 2.5 percent.
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 percent to 2 percent pace in 2019 following a 3.1 percent 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 with last year’s very strong performance.” The Chicago Fed chief said if economic growth meets expectations, further tightening would depend on faster inflation.
Fed monetary policy ‘about right’ after pivot
The Federal Reserve is getting monetary policy “about right” after pivoting in recent weeks to a decidedly more dovish posture than at the end of 2018, according to a plurality of economists surveyed by Bloomberg.
Just under half of all respondents to a March 21-22 questionnaire expressed approval of the Fed’s outlook for interest rates; 37 percent said the Fed was too dovish, while 14 percent said policy makers were too hawkish.
The Federal Open Market Committee signaled that policy makers are unlikely to raise rates at all this year, compared to the two 2019 hikes officials foresaw in December. Only part of that downgrade was anticipated, and Chairman Jerome Powell went further in his March 20 post-FOMC meeting press conference, calling too-low inflation “one of the major challenges of our time.’’