Fed’s Evans Says ‘Open’ to Half-Point Interest-Rate Hike

• Chicago Fed chief’s rate forecasts ‘in line with’ median
• Evans notes median call is seven quarter-point hikes in 2022

Federal Reserve Bank of Chicago President Charles Evans said he’s “comfortable” with raising interest rates by quarter percentage-point increments, while being “open” to a bigger 50 basis-point move if needed.

“We want to be careful, we want to be humble and nimble, and get to neutral before too long — maybe 50 helps, I’m open to that,” Evans said in answering a question after a Thursday speech to the Detroit Regional Chamber. “I would be comfortable with each meeting increasing by a quarter point.”

He suggested that opting for a bigger hike at one meeting could then create a messaging challenge for the following one. “How you deal with the communications of if you do 50, what does that mean for the next one,” he said in answering reporter questions.

“Once you start talking about different paces, I think it just opens up the question of where are you headed if you’re going so fast,” Evans said. “Those are conversations that will just have to be had throughout the year.”

Evans is not a voting member of the policy-setting Federal Open Market Committee this year.

Recession Risk

The Chicago Fed chief also said that while he cannot see how rate rises from near zero on their own trigger a U.S. recession, he’s “nervous” and mindful that other things could derail the “soft landing” scenario for bringing down high inflation.

Investors have boosted bets on a half-point move at the FOMC’s May 3-4 meeting, after Chair Jerome Powell said Monday that the central bank was prepared to take such a step if necessary to control the hottest price pressures in four decades.

In his speech, Evans said, “My own viewpoint is in line with the median assessment” of Fed officials’ projections released earlier this month. He noted that the median call was for seven quarter-point moves for all of 2022, with the policy rate moving up to 2.75% to 3% by the end of next year.

“Monetary policy is not on a preset course,” Evans said.

Balance Sheet

As for beginning to shrink the Fed’s near-$9 trillion balance sheet, Evans said that he was “fine” with a steeper pace, and that the contraction will be faster than was done in 2017. He declined to offer any numbers he favors for the monthly runoff in the Fed’s bond portfolio. Powell has said the FOMC could announce its plan at the May meeting.

Evans also said he would be open to tilting reinvestments from maturing bond holdings toward Treasury bills — something some market participants have speculated about as a way of allowing the Fed to shrink its balance sheet faster. The Chicago Fed chief noted that the mortgage-backed securities on the balance sheet are long duration — meaning it will take years for them to mature — so “clean-up” operations such as via reinvestments may be needed.

Speaking separately Thursday, Fed Governor Christopher Waller said the central bank “at a later date, certainly not anytime soon” may consider sales of MBS.

Minneapolis Fed President Neel Kashkari, meantime, said Thursday that 10-year Treasury yields — which have surged this quarter — remain historically low.

Not 1980s

“That is telling me that the interest rate environment that we’re in” is “quite low relative to history and it’s telling us that inflation expectations — people’s confidence about inflation in the future — is also close to where it should be,” Kashkari said.

Fed officials raised rates by a quarter point last week for the first increase since 2018, bringing the benchmark to a range of 0.25% to 0.5%.

Evans drew a distinction between the high inflation of the 1980s and that of today. While “overly accommodative monetary policy” in the 1960s and 1970s contributed to a buildup of long-term inflation expectations, the current surge in prices “largely reflects real supply shocks and weakened supply chains and logistics in the face of strong, outsized demand for goods and diminished labor force participation.”

“A shift in demand back toward services, an increase in supply in response to higher relative prices and wages, and adjustments in business models to adapt to the evolving environment will eventually alleviate many of the supply-side pressures we face today,” the Chicago Fed chief said.

Even so, the Fed needs to act, Evans said: “If monetary policy did not respond to these broader pressures, we would see higher inflation become embedded in inflation expectations, and we would have even harder work to do to rein it in.”

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