Former Chicago Fed President Charles Evans says September rate cut is possible

Former Chicago Fed President Charles Evans says September rate cut is possible

Charles Evans, the former Chicago Fed president, said Monday that he thinks it is possible that the U.S. central bank could cut interest rates in September.

“If the data improve, I suppose September is possible,” Evans said in an interview with MarketWatch.

The Fed last week kept its benchmark policy rate in the 5.25%-5.5% range where it has been since last July.

At a press conference, Federal Reserve Chair Jerome Powell said the Fed is “looking for something that gives us confidence that inflation is moving sustainably down” before cutting rates.

Evans told MarketWatch that Fed officials have been engaged in “a very careful communications strategy,” sending a consistent message that it needs a few more months of good data before it cuts interest rates.

“If they got two more very good inflation reports, I think they would scratch their heads and say, maybe they are comfortable,” Evans said.

Evans said a cut would depend on how much better the inflation data actually was.

At its meeting last week, the median forecast of 19 Fed officials was for a single rate cut this year.

Economists are divided between a first cut in September or waiting for December. Traders in derivative markets see the Fed cutting interest rates twice starting in September.

Evans said the Fed doesn’t have a lot of past experience with today’s environment where the economy continues to do well even as the Fed’s benchmark policy rate is putting downward pressure on demand.

For Fed officials, there is an incentive to leave rates unchanged if there is a chance the level will bring down inflation more quickly without a large cost, Evans said.

There is a risk that the negative impact of the Fed’s restrictive level of rates is just being delayed and the lagged effect will eventually hit the economy hard. It will be hard for the U.S. central bank to cushion the blow at that point.

“That’s a risk and at the moment they are accepting the risk,” Evans said.

Stepping back, there is still a good chance that the Fed achieves a soft landing, Evans said.

A soft landing would be where the Fed finds inflation running at a level where the U.S. central bankers can say, “That is good enough,” Evans said.

Even an unemployment rate as high as 4.5% could be a soft landing, if it didn’t trigger a recession and if inflation fell back to target, he said.

The unemployment rate rose to 4% in May, its highest level in two years.

Evans said that consumer spending has been strong enough to keep powering the economy.

“Labor markets have supported the strong consumer markets and investment has been decent,” he said.

Evans said his forecast for the economy is close to the projections of Wall Street economists.

“The most likely forecast is that things continue to do well and there’s enough restrictiveness or supply chain improvements so that inflation comes down toward the Fed’s 2% target,” he said.

At some point, the Fed will face “a whole bunch of questions” about where it would like inflation to eventually settle.

“It is a pretty stiff performance level that they set for themselves. They want to get inflation down to 2% sustainably,” Evans said.

For instance, if inflation gets down to 2.4%, would the Fed be content, or would they lean heavily on the economy to bring it down further, he wondered.

“We’re not at that phase. But with good fortune, they will get there,” he said.

Bad fortune would be if the economy starts weakening markedly, he said. In that scenario, the Fed would have to find some balance between rising unemployment and inflation. If inflation were in the neighborhood of 2.5% and the unemployment rate was rising, it would be very challenging for the Fed to say it had to get back to its 2% target, he said.