By Ann Saphir
CHICAGO (Reuters) – The U.S. Federal Reserve has eased policy substantially since late last year, but more interest rate cuts may be needed to offset not just sluggish inflation but also headwinds to growth from trade-related uncertainty, Chicago Fed President Charles Evans said on Wednesday.
“You could take the view, as I have, that inflation alone would call for more accommodation than we put in place with just our last meeting,” Evans told reporters in an annual interview in Chicago.
“You might take the view that things have perhaps created more headwinds against that, and it would be reasonable to do more … I don’t know,” he said, adding that he’ll be looking at data and business commentary to assess that.
Risk management concerns – the idea that the Fed needs to apply more firepower earlier on against a potential downturn when rates are closer to zero – could also argue for more policy accommodation, he said.
Evans voted with the majority on the Fed’s policy-setting committee last week to cut rates by a quarter of a percentage point, to a target range of 2.00% to 2.25%, and said before the meeting that rates ought to be another quarter of a point lower by the end of the year to help boost inflation back to the Fed’s 2% annual target.
He repeated that view on Wednesday, and while he said he expects U.S. GDP to grow about 2.25% this year and continues to see a good labor market, he added that “if the labor market starts to slow or does something else, that’s going to be a risk, because the consumer has been the lynchpin of growth.”
Last week’s “mid-cycle” move adjusted policy from projecting continued tightening to about 50 basis points of accommodation below Evans’ estimate of a 2.75% neutral rate, he said. That’s a “substantial” move that will help mitigate headwinds from uncertainty over trade negotiations and the fallout for business confidence and investment, he said.
But uncertainty caused by the U.S. trade war with China as well as related global developments are adding up. Three central banks in Asia cut interest rates overnight, with unexpectedly big reductions in India and New Zealand.
“I did take note,” Evans said. “We are going to be digesting everything that’s going on.”
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