Chicago Fed seeks small US rate hike between July or September for job evaluation

Charles Evans, president of the Federal Reserve Bank of Chicago, said Tuesday that he supports a shallow rate hike between July and September to give the Fed time to assess inflation and the job market as it neutralizes borrowing costs and possibly pushes them out.

“I think front-loading is important for accelerating the necessary tightening of the financial situation, as well as for demonstrating our commitment to controlling inflation, thus helping to keep inflation expectations under control,” Evans told Money Marketers in New York, noting that inflation is high.

The Fed has raised interest rates by three-quarters of a percentage point so far this year, with a larger-than-usual half-point increase earlier this month raising the cost of short-term debt to 0.75% -1%.

Fed Chair Jerome Powell has indicated an increase of at least two half-point rates. On Tuesday, he told the Wall Street Journal that the central bank would continue to “push” the rate hike until it saw inflation come down in a “clear and credible way”, if not, do not hesitate to move more aggressively. Read the full story

Evans told reporters that rates should probably go above neutrality, but pushing them there makes him “nervous” because it is difficult to know exactly when partially the rate will start to rise, and other risks may arise suddenly.

So instead of moving forward on the half-point jump, Evans wants to go more slowly.

“I hope that in July, September, we will talk about it,” Evans told reporters after his remarks. By December, he said, he expects “we will complete any 50 (base point hikes) and set up at least 25 (base point hikes).”

This slowdown will give the Fed time to examine whether the supply chain is shrinking and to assess the dynamics of inflation and the impact of higher borrowing costs in what it calls the “direct tightening” labor market. Unemployment is at a record high of 3.6% and job openings.

“If we need to, we would be in a better position to respond more aggressively if the inflation situation does not improve enough, or, alternatively, to scale the planned adjustments if the economic situation softens in a way that threatens our employment order,” Evans said.

Future contract prices tied to the Fed’s policy rate reflect expectations for a last-year policy rate range of 2.75% -3% and a rate increase in the 3% -3.25% range.

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

“Given the current strength of aggregate demand, strong demand for workers, and supply-side improvements that I hope, I believe a moderately limited position will still be consistent with a growing economy,” Evans said.