Fed's Evans Says Too Soon to Say if Coronavirus Shock Needs Rate Cut
February 27 2020 - 03:25PM
Dow Jones News
By Anthony Harrup and Michael S. Derby
MEXICO CITY -- Chicago Fed President Charles Evans said Thursday
that the U.S. central bank is closely monitoring the fallout from
the spread of the coronavirus, but would look for an impact on the
economy before thinking of a monetary policy response.
That could take time, as the evolution of the epidemic is still
uncertain, he said at an event in Mexico City. Despite the recent
market selloff driven by fears about the effects the coronavirus
could have on economic growth, it is too early to think of reducing
U.S. growth forecasts, Mr. Evans said.
Still, a monetary policy response wouldn't be ruled out if a
need were seen.
"We're monitoring very closely and if we see something that does
require an adjustment, I'm confident we would give that all the
consideration it needs," he told reporters after a speech.
Mr. Evans was a voting member of the rate-setting Federal Open
Market Committee last year, but he doesn't have a vote this year
due to the annual rotation of regional bank presidents. In 2019,
the Fed lowered rates three times to offset risks to an otherwise
healthy U.S. economy from trade policy uncertainty and slowing
global growth.
Mr. Evans said he felt comfortable that last year's three cuts
in the federal-funds rate to the current range of between 1.50% and
1.75% had positioned monetary policy for additional risks.
In its forecasts from December, most Fed officials said they
expected to keep rates steady for the year. But the coronavirus
situation, which has already caused upheaval in China's economy and
is now spreading beyond that nation's borders, is raising worries
about the U.S. outlook. Financial markets have booked big losses
and futures markets now predict the Fed will lower rates at its
March meeting, and cut again as the year moves forward.
So far, no Fed officials have joined with the market outlook.
Those who have spoken have acknowledged the fluid and uncertain
nature of events and have said they are watching the data for signs
of how to react.
In his formal remarks, Mr. Evans said the Fed may need to let
inflation overshoot its 2% target in the future as part of an
effort to ensure price pressures aren't too weak and monetary
policy doesn't get stuck at near zero rates.
Mr. Evans also said that because the risks of falling to near
zero rates are now higher, the Fed must be prepared to use stimulus
tools like bond buying and guidance about the future of interest
rates when needed.
Mr. Evans's presentation was largely a review of current
thinking about how the Fed can achieve its 2% target, something it
has failed to do with any consistency since adopting it in 2012. At
the same time, changes in the financial system and economy have led
to a lower level of short-term rates, which has further complicated
the Fed's ability to help influence the economy and achieve its
inflation target.
Mr. Evans noted that the Fed's inflation shortfall is dramatic.
He said that the trend of price increases is 5.3% below where it
should be had that trend risen by 2% since 2007, when the financial
crisis began. If the Fed wanted to get the price trend back to
where it should be, average inflation would need to rise to 4.7%
for two years. To get the price level back to trend in six years,
it would require average inflation of 2.9%.
Write to Anthony Harrup at anthony.harrup@wsj.com and Michael S.
Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
February 27, 2020 15:10 ET (20:10 GMT)
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