Chicago Fed wants smaller U.S. rate hikes by July or September to gauge inflation and labor market

Chicago Federal Reserve Chairman Charles Evans said Tuesday he supports moving to a shallower rate hike path by July or September to give the Fed time to assess inflation and the labor market as it pushes borrowing costs to neutral, and likely beyond.

“I think frontloading is important to accelerate the necessary tightening of financial conditions, as well as to demonstrate our commitment to containing inflation, thereby helping to keep inflationary expectations under control,” Evans told Money Marketeers in New York, noting that inflation is “far too high”.

The Fed has hiked interest rates by three-quarters of a percentage point so far this year, including a bigger-than-usual half-point hike at the start of the month that carried the costs of short-term borrowing at a range of 0.75% to 1%.

Fed Chairman Jerome Powell has signaled that at least two half-point rate hikes are coming. On Tuesday, he told the Wall Street Journal that the central bank would continue to “push” rate hikes until it sees inflation coming down “in a clear and convincing way”, not hesitating to act in a more aggressive if that didn’t happen. Read the full story

Rates will likely need to break above neutral, Evans told reporters, but pushing them there makes him “nervous,” in part because it’s hard to know exactly when rates will start to bite into growth, and other risks could suddenly emerge.

So rather than charging forward at half-point jumps, Evans wants to go slower.

“I expect in July, September, we’ll talk about it,” Evans told reporters after his speech. By December, he said, he expects “we will have completed 50 (basis point increases) and implemented at least some 25 (basis point increases)”.

This slower pace would give the Fed time to test whether supply chain issues are easing and assess inflation dynamics and the impact of rising borrowing costs on what he called a “downright tight” labor market. Unemployment is at 3.6% and job vacancies are at an all-time high.

“If we need to, we will be well placed to react more aggressively if inflation conditions do not improve sufficiently or, alternatively, to reduce the expected adjustments if economic conditions soften in a way that threatens our employment mandate,” Evans said.

Fed policy rate futures prices reflect expectations of a year-end policy rate range of 2.75% to 3%, and rate hikes as high as 3% to 3.25% .

Critics, including several former US central bankers, have recently warned that the Fed, by waiting too long to raise rates, has prepared the economy for a recession.

“Given the current strength in aggregate demand, strong demand for workers, and improvements on the supply side that I expect, I believe a mildly restrictive stance will still be consistent with a growing economy,” he said. said Evans.

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