Written by Jasir Jawaid and Polo Rocha
Chicago Federal Reserve President Charles Evans said Sept. 23 the Fed should not consider raising rates until the labor market achieves its full potential and inflation is "confidently" on track to go above 2%.
The Fed should be clear in its willingness to overshoot its 2% inflation target for some time, Evans said at a Market News International event, calling the central bank's recent changes to its guidance on future policy a "very powerful" way of communicating its intentions.
The central bank signaled last week it could keep rates at near-zero levels through 2023, but it also specified it plans on sticking with that policy until the labor market reaches maximum employment and inflation is "on track to moderately exceed 2% for some time."
"I think we just have to be pretty clear that 2.5% inflation for some period of time is likely in the cards if we're doing our jobs right," Evans said at the MNI event. "That's the kind of accommodation we need."
Evans' remarks clarified comments he made on Sept. 22, which some investors perceived as slightly hawkish. Evans had said that the Fed's language gives it flexibility to potentially "start raising rates before we start averaging 2%" inflation, according to Bloomberg News.
Evans, who has traditionally favored the dovish approach of accommodative monetary policy, said at the MNI event he believed he was describing what the Fed's forward guidance had stated.
The Fed "should confidently be on track to exceed 2%" before it considers any rate increases, which would still keep interest rates at stimulative levels, Evans said.
(US Federal Reserve)
Evans' Sept. 22 remarks had caused some strengthening in the dollar, but the comments were focused on "emphasizing that some flexibility remains embedded in the Fed's forward guidance," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note to clients. Still, he added, the slight confusion was indicative of a communication challenge as Fed officials begin to take somewhat different stances on their policy guidance.
"The fact that Fedspeak has not been uniform itself weakens the Committee's attempt at forward guidance," Lyngen wrote. "If credibility becomes a concern, [inflation] breakevens will drift lower and real rates higher; a space to watch to be sure."
Fed Vice Chairman Richard Clarida reiterated the Fed's forward guidance during a Bloomberg Television interview, saying that the eventual overshoot is intended to "anchor" inflation expectations around 2%.
Fed officials: U.S. remains in a "deep hole" despite some recovery
But while the economy is now on the mend, the U.S. is "still in a deep hole" that will keep inflation pressures from emerging, Clarida said.
Other Fed officials also emphasized that the U.S. is far from a full economic recovery. Fed Chairman Jerome Powell told a House subcommittee that a full recovery is unlikely until the virus is under control and that more fiscal help from Congress will likely be needed.
"There's a long way to go," Powell said. "We need to stay with it, all of us. The recovery will go faster if there's support coming both from Congress and from the Fed."
Elsewhere, Boston Fed President Eric Rosengren said there are several reasons that his forecast for the economy is "less optimistic" than those of some of his Fed colleagues, including concerns that infections could spike this fall and winter and because additional support from fiscal policy seems unlikely to materialize anytime soon.
(US Federal Reserve)
"Recent economic data have been encouraging, but I believe the most difficult part of the recovery is still ahead of us," Rosengren said at a Boston Economic Club event, adding that a full recovery likely requires COVID-19 vaccine availability and effective treatment.
He also noted his concerns over the potential for a "second shoe dropping" as small and midsize banks struggle with nonperforming small business loans and commercial real estate credit.
"A curtailment of credit resulting from such problems has caused serious headwinds to recoveries in the past, and may be a serious problem going forward," he said.
Meanwhile, Fed Vice Chairman for Supervision Randal Quarles said that while the return from this spring's historic collapse "will take time to reverse," he was optimistic that the U.S. can avoid the worst scenarios many had feared earlier this year. The economy has rebounded more strongly than almost any forecaster expected," driven by strong momentum in consumer spending.
But continued resurgence of the virus and its potential to weigh on consumers' willingness to spend could cause business closures and have longer-term ramifications, Quarles noted.
"While I am optimistic that recovery is underway and the worst outcomes can be avoided, these concerns suggest that policymakers around the world need to remain watchful and ready to act further," he said in a speech to the Institute of International Bankers.
This article was published by S&P Global Market Intelligence on the S&P Capital IQ Pro platform.
Comments