The Federal Reserve's two interest rate cuts are helping guard the U.S. economy against growing downside risks, but the country's economic fundamentals remain "solid," Chicago Fed President Charles Evans said Oct. 1.
Evans, who voted for the Fed's two rate cuts this year, warned about slowing momentum in corporate investment as weaker global growth reduces the demand for U.S. products and trade policy adds further uncertainty to businesses' decision-making.
But worries about growth "are about potential risks that could be costly but also may never occur," he said in a speech in Frankfurt, Germany. A healthy U.S. consumer sector is continuing to provide a boost to an economy that Evans expects to grow by about 2.25% this year, slightly down from roughly 2.5% over the past year and a half.
Evans said his projections for the U.S. economy "have not changed much" in recent months. The current outlook simply requires "some modest repositioning [of Fed policy] in order to better align against possible risks."
The Federal Open Market Committee lowered its benchmark federal funds rate in July and again in September, putting it at a target range of 1.75% to 2%. That range is below Fed officials' 2.5% median estimate of the longer-run neutral rate — the rate at which Fed officials would be neither providing extra support to the economy through lower rates nor constraining it via higher ones.
Last year, Evans and most other Fed officials were projecting rate hikes that would put rates above neutral and therefore tap the brakes on the economy. But Evans noted that he and others on the FOMC have shifted away from that outlook due to growth risks and disappointing inflation figures.
"I concluded that the situation called for us to cut policy rates 50 to 75 basis points below the long-run neutral rate and then leave policy on hold for a time," Evans said.
Evans told CNBC a day earlier that the Fed's current rates have "helped move us into an accommodative stance" but that the central bank "might need to do more" if risks increase.
During his speech, he noted that inflation has "become a seemingly perennial source of frustration" by continuing to register below the Fed's 2% goal. The Fed's preferred gauge, the core personal consumption expenditures index, was at 2% for several months last year but fell below the target again in 2019.
The dip was partly due to temporary factors that have reversed themselves to some extent, Evans said, noting that core PCE inflation rose by 1.8% year over year in August. That was up from 1.7% in July and the 1.5% growth rate in March and May.
"The disappointing inflation developments this year suggest that more work is necessary," Evans said. "I do project that inflation will move up and then modestly overshoot our 2% target over the next few years; but this requires aid from a more accommodative monetary policy path now than I thought appropriate in December."
