By Howard Schneider
CHICAGO (Reuters) – The U.S. Federal Reserve may still be able to lower inflation without a sharp rise in unemployment even as it continues raising interest rates, Chicago Fed president Charles Evans said Monday, a rebuttal to arguments the Fed is pushing the world and the U.S. towards a potentially sharp downturn.
“I think we can bring inflation down relatively quickly
while also avoiding a recession,” Evans said, citing “unusual behavior” in the economy that should allow the Fed “to disinflate without a large increase in unemployment if we navigate the path to a reasonably restrictive policy setting carefully and judiciously.”
In remarks prepared for delivery to a National Association for Business Economics conference, Evans said he still sees the target federal funds rate rising to “a bit above 4.5% early next year and then remaining at this level for some time,” an outlook in line with a Fed consensus some analysts feel is causing perilous stress in financial markets.
While acknowledging the volatility and that he might be “sounding rather optimistic,” Evans said he thinks that because of “unusual interactions” between the job market and supply chains, “labor market stress is having a larger effect on inflation than would typically be the case.”
As higher interest rates curb demand and reduce “the heat” in labor markets, Evans said that same dynamic should allow inflation to fall “without having to generate an inordinate amount of slack in the economy” in the form of markedly higher unemployment.
Current Fed projections show the unemployment rate rising nearly a percentage point, to 4.4% by the end of next year from 3.5% as of September, while the Fed’s target measure of inflation drops to 2.8% from the current 6.2% as of August – a substantial movement towards the Fed’s 2% target.
Evans called that “a pretty good looking soft landing.”
“While this does represent a noticeably softer labor market when compared with today’s, these certainly are not recession-like numbers,” Evans said.
The Fed has raised interest rates from near zero as of March to a range between 3 and 3.25%, moving most recently in three quarter point increments in a rapid effort to restrict credit and slow demand. Policymakers are expected to approve another three quarter point increase at its Nov. 1-2 meeting.
(Reporting by Howard Schneider; Editing by Chizu Nomiyama)
