Chicago Federal Reserve President Charles Evans is sticking with his projection that interest rates could comfortably run above the so-called neutral rate, a projection that comes as the stock market widely expects the Fed to continue with policy tightening well into 2019.
That means the Fed could hike rates up to four times next year, Evans said Friday at the Fixed-Income Forum in Chicago.
The Fed in November kept its benchmark target for rates unchanged in a 2% to 2.25% range, but a quarter-point December hike remains widely anticipated by markets as the central bank continues to unwind the extraordinary response it launched to revive the economy from the financial crisis 10 year ago.
Evans stressed Friday that neutral policy is a “vague” notion. He puts a neutral Fed-funds rate at 2.75%, but says other Fed members may have a different idea. And he thinks the Fed-funds rate could conceivably go as high as 3.25%, or 50 basis points above “neutral,” next year.
The official Fed projection, a survey of differing views at the bank, chalks out three rate increases next year. Evans said Friday he believes three or four hikes are most likely in 2019. Evans, who has turned more hawkish than in the early days of the rate-tightening cycle, takes his turn on the rotational policy-setting panel in 2019.
As for current policy, the Fed is a little bit short of neutral “but getting close enough, this is beginning to right-size a number of the risks we’ve been seeing,” including inflation, said Evans. The neutral rate refers to the interest rate that neither boosts nor impedes economic expansion.
The Chicago Fed head has said, and repeated Friday, that he expects the long-run rate of inflation to stick close to the central bank’s 2% target or just above. He sees little risk currently that inflation will lag behind much below that target.
Read: Fed watchers left puzzled by what Powell was trying to communicate
The S&P 500 index SPX, +0.22% has fallen roughly 7% from the end of September through the middle of November in part on concern about rising borrowing costs.
But Evans said even with rising rates, there’s little on the horizon to derail the economy, which should cheer the market. Evans even offered a nod Friday to stock-market confidence: “Business people are really smart and must know what they’re doing. If they’re giving away capital as [share] buybacks, they must feel pretty optimistic.”
Related: If you’re expecting buybacks to rescue the stock market, think again, says strategist
Evans was asked about intensifying risks from abroad as Europe faces economic slowing and its own trade concerns around a rough Brexit split, and as China’s slowing expansion shows its vulnerability. The Chicago Fed head conceded that global unknowns are and should be a frequent topic among policy makers, but added that there’s nothing on the immediate horizon overseas that would cause him to rethink his expectations for above-trend 2.5% U.S. economic growth in 2019. He already thinks GDP growth will slow by 2021 to a long-term sustainable trend at 1.75%, or just below.
He was also asked whether evidence of a weakening housing market, including red flags from the construction industry over materials costs, tariffs and weakening demand presented increasing risks of a consumer-led downturn, especially if mortgage-rate increases bring about a more disorderly housing-market retreat than methodical, controlled Fed tightening would indicate.
Evans said the housing recovery wasn’t as evenly spread across all income groups since the crisis as it was for other expansions and issues like swelling student debt can strain the financial fitness of would-be homeowners. That said, he is soothed by more manageable household balance sheets than during the recession.
Read: Households remain far less in debt than they were during the recession
“There is not a great risk headline right now,” he said. “Global growth, housing are all in the mix, but not enough to upset the [growth] trajectory [of GDP running at an above-trend 2.5% next year] that I have in mind.”
Read: Powell says he’s optimistic about economy as he notes concerns from abroad
