Chicago Fed chair says slow economy could delay rate hikes

The Chicago Fed chair says that interest rate hikes may have to be delayed if the US and global economies continue to decelerate.

Charles Evans, Chicago’s Federal Reserve chair, said that the Fed may have to delay raising interest rates until 2020 if the US economy slows down in 2019. Evans made the comments soon after the national Fed chair, Jerome Powell, announced that the Fed would not raise interest rates for the rest of the year.

Why does Evans think interest rates may need to be raised?

Evans made the remarks soon after the Federal Open Market Committee (FOMC) noted that the US central bank won’t raise interest rates because the US economy is strong, but showing possible signs of decline. The Federal Reserve also projected that the US economy would only grow between 1.75-2%. Evans noted that the news of a global economic slowdown could mean the Fed will be more patient when considering interest rate increases.

‘At the moment, the risks from the downside scenarios loom larger than those from the upside ones. If activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold — or perhaps even loosened — to provide the appropriate accommodation to obtain our objectives,’ said Evans.

Evans said that if the economy doesn’t grow at a faster rate, interest rate hikes may have to be postponed until late in 2020.

‘I see things[ an economic slowdown] impeding inflation a bit, and I want to see inflation get up. So my own path is not to expect a funds rate increase until next year, probably, the second half,’ said Evans.

Will the inverted yield curve hurt the US economy?

Another troubling sign for the US economy was the yield curve inverting, with yields of three-month Treasury notes rising higher than the ones on 10-year Treasury notes. The short-term three-month yield being higher than the long-term 10-year rate is an inversion that usually means that investors are less certain about the strength of the economy. Evans felt that the trend was not a cause of great concern and he felt that the US economy was strong overall.

‘I look at the nature of the US economy, I look at the labor market, it’s strong, the consumer continues to be strong,’ said Evans.

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