MNI INTERVIEW: Fed Will Stay Patient On Rocky Road To 2%-Evans

Federal Reserve officials might manage to cut interest rates once or twice this year but they are right to wait and see whether the recent stickiness of inflation persists after a bumpy start to the year, former Chicago Fed President Charles Evans told MNI.

Evans said he’s impressed by the speed with which inflation has come down from 2022 peaks around 9%, but that getting it back to 2% requires more work.

“The FOMC has stated very clearly and carefully that they’re aiming for returning to 2% sustainable inflation and that’s a pretty stiff performance bar I would say, from where they are,” he told the latest episode of MNI’s FedSpeak Podcast.

A number of key measures remain above levels that were once consistent with the Fed’s 2% official target, Evans said, including what he called the "trilemma" of core goods inflation, shelter costs, and services excluding housing.

“If you look at the configuration of those three prices during that time period and now, the dispersion and high levels of them, you scratch your head and you go can I ever get them back into that box that delivered 2%?” said Evans, who spent more than three decades at the Chicago Fed, including 13 as its president.

“That’s why I would say I’m very sympathetic to this view that they need more confidence, they need to see improvements. So, they’re going to wait.” (See MNI INTERVIEW: Fed Might Not Cut Rates Until 2025-Swanson)

WAIT AND SEE

The Fed might cut rates later this year in response to a further decline in inflation or, alternatively, ease policy in reaction to an unexpected weakening in growth or spike in unemployment, said Evans.

“I think one to two rate cuts this year makes sense, the question is what’s the data going to do. And then there’s a question of is it only the CPI data that’s going to be determinative,” he said.

He noted FOMC members’ still have a fairly benign outlook for growth and unemployment in their latest quarterly projections despite an uptick in their inflation view and a reduction in the median number of expected rate cuts to just one from three in March.

“They’ve got the proverbial soft landing – growth at trend, unemployment staying fairly low,” said Evans.

Worries about inflation are more likely to delay any rate cuts than any considerations about appearing political by cutting rates or refraining to do so around a presidential election.

“In all my experience the Fed looks at the data, it looks at the economy and it makes a choice on the basis of what its mandate is and it just doesn’t let the election get in the way of that. They raised rates throughout the 2004 election, they did what they needed to in 2008, things were happening very quickly. I think they’ll end up doing what they need to do,” he said.

SEPs AND SCENARIOS

Evans said the Fed’s SEP is a double-edged sword. Sometimes it’s a very useful signaling tool but at others it appears to unduly bind the FOMC into an outlook that policymakers are not necessarily embracing wholeheartedly.

On the other hand, scenario analysis, which has been gaining ground as an approach within the Fed after a recommendation to the Bank of England from former Fed Chair Ben Bernanke, can be useful but also has its pitfalls.

“That’s more information to sift through but is also viewed as confusing to the public,” he said. “You’re going to put more predictions out there and a lot of people are not going to like the criticism that, well, you looked at this and you were totally wrong."