As economy picks up steam, businesses and consumers ‘can live with’ higher interest rates, Chicago Fed president says
The following article originally published in the WSJ 7/11/18
CHICAGO—The boost to U.S. economic growth from recent tax cuts and spending increases, together with more-stable price pressures, has made Federal Reserve officials comfortable with raising interest rates more than they anticipated earlier this year.
Among them is Federal Reserve Bank of Chicago President Charles Evans, who dissented when his colleagues voted to raise rates last December because he worried then about weak inflation. In an interview Monday, he said he is now comfortable with one or two more Fed rate increases this year, following on the central bank’s two moves so far this year.
“The economy seems so strong it seems natural that businesses and consumers can live with” slightly higher interest rates, he said, citing the effects of the fiscal measures approved by Congress and the White House.
“Whether or not you think we should [raise rates] three times in 2018 or four times in 2018, it’s really not going to make a big difference,” he said.
Mr. Evans’s comments echo those of Fed governor Lael Brainard, another once-prominent advocate for a slow pace of rate increases who has recently shifted toward warning against the dangers of letting the economy overheat.
Together, they show how fiscal stimulus hitting the economy during a period of low unemployment has created new challenges for the Fed in preventing excessive inflation or asset bubbles.
The bright economic outlook explains the Fed’s solid consensus in favor of raising rates. At the June meeting, eight out of 15 central bank officials said they expected at least four rate increases would be necessary this year, up from four out of 16 in December.
Others who began the year anticipating just two rate increases in 2018, including Philadelphia Fed President Patrick Harker and Atlanta Fed President Raphael Bostic, now say they think the economy will warrant three rate increases.
Mr. Evans said strong economic growth for now also makes the risks of a drag on investment from tariffs and other trade disruptions less critical. “There are definitely downside risks, but the strength of the economy is really pretty important at the moment,” he said. “The fundamentals for the U.S. economy are very strong.”
Mr. Evans has long viewed cautiously the need to raise rates given the Fed’s yearslong struggle to raise inflation to its 2% target. As recently as January, Mr. Evans said he would prefer the central bank to hold off on rate increases until this summer to take stock of inflation.
Since then, Congress approved a sizable two-year federal spending increase on the heels of the $1.5 trillion tax cut enacted at the end of last year. The unemployment rate has fallen to 4% and is expected to drop lower as fiscal policy stimulates demand and investment.
Meanwhile, inflation has firmed. Consumer prices rose 2.3% in May from a year before, and excluding volatile food and energy categories, were up 2%, according to the Fed’s preferred inflation gauge. It is the first time both measures have reached the Fed’s 2% target since 2012.
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