Charles Evans, who used to be president of the Chicago Fed, said on Monday that he thinks the U.S. central bank might lower interest rates in September.
Evan Evans told BourseWatch, “I suppose September is possible if the data get better.”
Since July of last year, the Fed has kept its key interest rate in the range of 5.25% to 5.5%.
Before lowering rates, Federal Reserve Chair Jerome Powell told reporters that the Fed is “looking for something that gives us confidence that inflation is moving sustainably down.”
Fed officials have been using “a very careful communications strategy,” according to Evans. They have been sending the same message that they need a few more months of good data before they cut interest rates.
Evans said, “If they got two more very good inflation reports, I think they would scratch their heads and say, maybe they are comfortable.”
Evans said that a cut would depend on how much better the data on inflation were.
When the Fed met last week, 19 of them agreed that rates would be lowered just once this year.
Economists are split on whether the first cut should happen in September or in December. Traders in derivatives think that the Federal Reserve will lower interest rates twice starting in September.
Evans said that the Fed doesn’t have a lot of experience with the current situation, in which the economy is still doing well even though the Fed’s key policy rate is lowering demand.
“Fed officials have a reason to leave rates alone if there is a chance that the level will bring down inflation more quickly without a big cost,” Evans said.
The Fed’s low interest rates may be having a negative effect on the economy, but it may not show up right away. This effect will eventually hit hard in the future. At that point, it will be hard for the U.S. central bank to soften the blow.
Evans said, “That’s a risk, and right now they’re willing to take it.”
Evans said that there is still a good chance that the Fed will be able to achieve a “soft landing.”
Evans said that a “soft landing” would happen when the Fed finds inflation at a level where they can say, “That’s good enough.”
He said that even a 4.5% unemployment rate could be a soft landing as long as it didn’t cause a recession and inflation went back to its target level.
4% is the highest rate of unemployment it has been in two years. It was reached in May.
Evans said that people have been spending a lot of money, which has kept the economy going.
“Strong consumer markets have been helped by strong labor markets, and investment has been good,” he said.
Evans said that his prediction for the economy is pretty close to what economists on Wall Street think will happen.
“It’s most likely that things will keep going well and that there will be enough restrictions or improvements to the supply chain to bring inflation down to the Fed’s 2% target,” he said.
The Fed will have to answer “a whole bunch of questions” about where it wants inflation to end up at some point.
“They set a pretty high bar for itself in terms of performance.” Evans said, “They want to get inflation down to 2% in a way that can be kept up.”
Inflation might drop to 2.4%, but would the Federal Reserve be happy with that? Or would they put a lot of pressure on the economy to bring it down even more?
“That stage is not here yet.” “But with luck, they’ll make it,” he said.
He said it would be bad luck if the economy started to get much worse. In that case, the Fed would have to find a way to keep inflation and unemployment from getting too high. He said that it would be hard for the Fed to say it had to get back to its 2% goal if inflation was around 2.5% and the unemployment rate was going up.
