In a speech titled “Monetary Policy: The Road Ahead“, Chicago Fed President Charles Evans said the economy is now “approaching the tenth year of the expansion” and “fundamentals for growth are solid”. He expected unemployment rate to drop further to around 3.5% by the end of 2020, a full percent point below “natural rate”. Evans also expected inflation to “rise a bit further” over the next few years. And he added ” I expect tighter labor markets to lead to higher wage growth before too long.”
On monetary policy, he noted that most FOMC members put neutral rate somewhere between 2.5 – 3.0%. The 3-3.5% projected for 2019 and 2020 is “mildly restrictive”. Evans noted that “given an unemployment rate forecast below the natural rate, such a policy stance would be quite normal and consistent with some moderation in growth and a gradual return of employment to its longer-run sustainable level.”
Nonetheless, he also pointed out there may be need to tighten further is the “currently unexpected tailwinds emerge that push the economy too far beyond sustainable growth and employment levels, potentially leading to unacceptably high inflation beyond our symmetric 2 percent objective. ” On the other hand, Fed may need a “shallower policy path if expected headwinds emerge”, such as trade tensions.
Evans also said it’s premature to read a signal into flattening yield curve. He noted that long-term borrowing costs have been declining for a while. And all other signals suggest a strong economy.
Overall, Evans just repeated what he said before. He was one of the few who openly said recently that interest rate may need to enter into restrictive region.