The Fed: Fed’s Evans says interest rates likely moving higher while others urge caution

An earlier version of this story incorrectly stated the timeframe of when Charles Evans expected interest rates to rise to a range of 3%-3.25%. The story has been corrected.



Bloomberg

Chicago Fed President Charles Evans

The Federal Reserve is likely to “eventually” push interest rates up slightly into restrictive territory if the dark clouds over the outlook clear up, said Chicago Fed President Charles Evans on Wednesday.

“If the downside risks dissipate and the fundamentals continue to be strong, I expect that eventually the fed funds rate will rise a touch above its neutral rate — say up to a range between 3% and 3.25%, Evans said in a speech to the Discover Financial Services Company meeting in suburban Chicago.

That’s higher than the median Fed forecast of a “neutral” 2.75% long-run neutral interest rate.

Evans is projecting three more quarter-point rate increases “eventually.”

The Fed has penciled in two moves in 2019. Investors are pricing in no interest rate moves this year.

On the timing of future moves, Evans suggested the Fed could afford to wait for six months to see how things play out.

“I think developments in the first half of 2019 will be very important for making this assessment of our future monetary policy actions,” Evans said.

“Hopefully, the economic data will be more like the strong December employment report and financial market volatility will settle down,” Evans said.

The Chicago Fed president is a voting member of the central bank’s interest-rate committee this year.

It was clear that other Fed officials do not share Evans’ relatively hawkish views.

Another voting FOMC member, St. Louis Fed President James Bullard, warned in an interview with the Wall Street Journal that more interest-rate rises could push the economy into a recession.

And Atlanta Fed President Raphael Bostic, who is not a voter this year, said in a speech that he didn’t think the Fed should push interest rates above the neutral level.

“All the available evidence at the moment points to caution regarding firms’ approach to expansion,” Bostic said.

In his remarks, Evans said he expects real GDP growth to be a bit above 2% this year. The unemployment rate will decline toward 3.5%.

Evans said his contacts report rising input costs and higher wages.

“Today, the pricing environment seems much different that it did over the past few years,” he said.

Inflation should average a touch above 2% over the next three years, he said.

He said a modest period of inflation running nearer 2.5% “would not be a big policy concern.”

The yield on the 10-year Treasury note

TMUBMUSD10Y, -0.26%

 was up slightly Wednesday at 2.74%, but well below highs of 3.24% seen last November.

Stocks

DJIA, +0.45%

  traded higher on hopes for the easing of U.S.-China trade tensions.

Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.

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