Chicago Fed President Charles Evans said that in the case of continued downward inflation, maintaining current policy interest rates will put greater downward pressure on demand, which will actually have a tightening effect on monetary policy. Since July last year, the Federal Reserve has not adjusted monetary policy, and the federal funds rate target range has been maintained at 5.25% to 5.50%, the highest level in over 20 years.
On Tuesday (July 2nd) local time, Chicago Fed Chairman Charles Evans said that if the policy interest rate level is maintained in the face of continuing inflation declines, it will put greater downward pressure on demand, which will actually tighten the monetary policy.
Evans participated in the European Central Bank Forum in Portugal on Tuesday and said during the event that "our policy" is restrictive and that the actual federal funds rate (nominal rate minus inflation rate) has reached the highest level in decades. Restrictiveness will become stronger as inflation rates continue to fall.
Evans noted that this means that if the Federal Reserve leaves the policy unchanged, it will actually tighten the monetary policy.
Since July of last year, the Federal Reserve has not adjusted its monetary policy, and the target range for the federal funds rate has remained at 5.25% to 5.50%, the highest level in more than 20 years.
Data released last week showed that the May PCE index for personal consumption expenditure in the United States remained unchanged month-on-month, with a year-on-year increase of 2.6%. Excluding volatile factors such as food and energy, the May core PCE price index increased by 0.1% month-on-month and rose by 2.6% year-on-year. Federal Reserve officials regard core PCE price index as a priority inflation indicator.
Evans warned that the real economy is transitioning from strong to weak, and if the Federal Reserve needs to apply greater downward pressure on demand, it will have to start considering the real economy.
Regarding the timing of interest rate cuts, Evans refused to make predictions and said that he did not want to tie the central bank's hands.
Financial markets currently expect the Federal Reserve to cut interest rates by 25 basis points twice in the second half of the year.
If Evans can see more inflation data like the past few months, he will be confident in cutting interest rates.
As a dove in the Federal Reserve decision-making layer, Evans said last year that the U.S. economy was on a golden path, with declining inflation and no recession.
The current question is whether the U.S. economy can continue this positive trend this year. Evans said, "I still think it's possible, you will only maintain the current restrictive policy when necessary."
He added that the high inflation in the first quarter of the United States this year seems to be temporary and that inflation is expected to continue to decline until it reaches the target level of 2%.
Edited by Jeffrey