MNI POLICY: Fed's Evans Says Rates Are Close To Right Place

By Evan Ryser

     WASHINGTON (MNI) - Federal Reserve Bank of Chicago President Charles Evans

on Wednesday said interest rate policy is currently "in a good place" and that

July and September rate cuts were appropriate given risks to the outlook.

     "I see that the economy today is generally in good shape and that policy is

close to the right place, but there are risks that require our diligent

attention," Evans said in prepared remarks given at the Greater Peoria Economic

Development Council in Illinois.

     "I think policy is probably in a good place right now."

     "All told, the growth outlook is good, and we have policy accommodation in

place to support rising inflation. That said, there is some risk that the

economy will have more difficulty navigating all the uncertainties out there or

that unexpected downside shocks might hit," Evans said.

     Evans, a voting member of the FOMC this year, noted that "solid" economic

growth and "strong" consumer expenditures should carry forward in the near term

"given the support of good fundamentals--namely, healthy household balance

sheets; elevated consumer confidence; and, most notably, a vibrant labor

market."

     But "the business sector has seen some unfavorable changes," with business

fixed investment losing "considerable momentum." Evans pointed to weaker foreign

demand, trade tensions, geopolitical risks, a prolonged slowdown abroad, and a

"good deal" of uncertainty in business decision-making.

     Evans continues to expect the U.S. economy to grow "a touch above 2%" in

2019, and to continue to run roughly in line with potential which he sees at

1.75%.

     If risks materialized, Evans said, "Of course, we obviously would act

aggressively if actually faced with an imminent downturn."

     He noted: "To avoid becoming stranded at the effective lower bound, risk

management calls for proactively cutting rates in response to increased downside

risks."

     --RISK MANAGEMENT IN A LOW-GROWTH ENVIRONMENT

     Inflation, which has only recently recovered to 1.8%, should rise slowly

and modestly overshoot the 2% target in a couple of years, Evans said.

     But some measures of inflation expectations have slipped further this year

and are "at uncomfortably low levels."

     Evans stressed the "need to err on the side of providing aggressive enough

accommodation to get inflation moving up with some momentum," which "could well

result in inflation modestly overrunning 2% for some time."

     If that were to occur, Evans said, it would better guarantee that "we would

actually meet our inflation target in the future" and "any excessive

overshooting could be controlled with modest rate hikes."

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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