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Chicago Federal Reserve Chairman Charles Evans maintains his expectation that interest rates could well exceed the so-called neutral rate, a forecast that comes as the stock market expects the Fed continue to tighten its policy until 2019.
That means the Fed could raise rates up to four times next year, Evans said at the Chicago Fixed Income Forum.
In November, the Fed kept its benchmark rate target unchanged at a range of 2% to 2.25%, but a rise of a quarter in December remains largely anticipated by the markets as the central bank continues to calm down. the extraordinary reaction she had launched to revive the market economy. financial crisis 10 years ago.
Evans pointed out Friday that neutral politics was a "vague" notion. He set a federal funds neutral rate at 2.75%, but added that other members of the Fed might have a different idea. And he thinks the federal funds rate could reach 3.25%, or 50 basis points above the "neutral" position next year.
The Fed's official projection, which examines the bank's different views, announces three rate hikes next year. Evans said on Friday that he thought that three or four hikes were the most likely in 2019. Evans, who became more hawkish than in the early days of the rate-tightening cycle, took his turn to form the group. work on the rotation of powers in 2019.
As for the current policy, the Fed lacks a bit of neutrality "but if we get close enough, it starts to resize a number of risks, including inflation," Evans said. The neutral rate refers to the rate of interest that neither increases nor prevents economic expansion.
The head of the Chicago Fed said, and repeated Friday, that he expects the long-term inflation rate to remain close to the 2% target of the central bank or just above. At present, he sees little risk that inflation is well below this target.
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The S & P 500 index
SPX, + 0.22%
fell by about 7% between late September and mid-November, in part because of concerns about rising borrowing costs.
However, he added, even with rising rates, there is little that risks derailing the economy, which should make the market happy. Evans even offered Friday a nod to the stock market's confidence: "Business people are really smart and need to know what they are doing. If they give capital as [share] buyouts, they must be rather optimistic. "
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Mr Evans was asked about the heightened foreign risks, as Europe was facing an economic slowdown and its own trade problems related to a Brexit division, and the slowdown in the expansion of China, which shows its vulnerability. The head of the Chicago Fed acknowledged that the unknowns of the planet were and should be a frequent topic among policymakers, but added that there was nothing on the immediate horizon abroad that would would require rethinking expectations for economic growth above the 2.5% trend in 2019. He already believes that GDP growth will slow down by 2021 to reach a long-term sustainable trend of 1.75%, or just below.
It was also asked if the signs of a weakening of the housing market, including construction industry alarm signals about the costs of materials, tariffs and the cost of the building. weakening demand, posed increasing risks of a slowdown caused by the consumer, especially if the increases in mortgage rates resulted in a more disastrous housing disruption than market decline indicated by a methodical and controlled tightening of the Fed.
Evans said housing recovery was not as well distributed among all income groups since the crisis as for other expansions and that issues such as student debt may weigh on the financial health of future homeowners. . That said, it is appeased by the more manageable household balance sheets than during the recession.
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"There is no big risk at the moment," he said. "Global growth, housing are all in the mix, but not enough to upset the [growth] path [of GDP running at an above-trend 2.5% next year] that I have in mind. "
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