Yesterday during an event held at the Marquette University Business Forum in Milwaukee, Federal Reserve Committee Member Charles Evans spoke out against jumping the gun and increasing interest rates. With policymakers due to decide on a Fed Funds interest rate increase in October or December, Charles Evans is now become one of the strongest voices that oppose a policy of monetary tightening.
Evans' comments follow what many see as an overly dovish September FOMC meeting where the chairwoman of the Federal Reserve, Janet Yellen emphasized global risks and low inflation as reasons to hold back from a 2015 interest rate liftoff. However in a subsequent speech Yellen tried to reign in the dovish sentiment by reiterating her view that a 2015 interest rate hike was still very much on the table.
On Monday, the influential president of the Chicago Federal Reserve in a strongly worded speech has championed the dovish argument. It would appear that Charles Evans is not in any hurry to increase interest rates. He told business leaders that a later lift off, better positioned the United States economy for the challenges that lie ahead.
The reticence of Mr. Evans to raise interest rates in 2015 is due to worries over inflation. In fact, the Chicago Fed chairman said that he was much less confident than his fellow colleagues on the FOMC of achieving 2% inflation target in the medium term.
Mr. Evans went on to say that the current downside inflation pressures that were being created by the strong US dollar and cheap energy prices would not abate until the middle of 2016. Charles Evans was also not as bullish on the job market saying that there was still slack even though the unemployment rate continues to drop.
Evans has a view that interest rates should not be increased until the inflation target is reached. He argued that to raise rates now would have the effect of damaging Federal Reserve credibility. Janet Yellen emphasized that Federal Reserve policy takes into account the six months to one year lagging effect between an interest rate increase and the impact on the real economy. Contrary to this view, Evans said it is better to wait until the inflation target reached before normalizing interest rates. Furthermore, Evans has the opinion that an inflation target overshoot was not an issued as this can be rectified if this event was to happen.
Evans has laid out a cautious view why the FOMC should not rush their decision to increase interest rates. However, this is not the view of the core of Federal Reserve members hold. This divergence from the majority view that a rate increase is still on the cards at the October or December meetings was highlighted with both Federal Reserve Committee Members John Williams and William Dudley on Monday, both talking up an interest rate rise happening before the end of 2015.
With important job numbers out this Friday, the picture will be a lot clearer after the news is released. The one elephant in the corner of the room is of course what is happening to global stock markets. For sure, Janet Yellen and her fellow FOMC members will have taken note of the bearish technical patterns that have been broken lower on the major US Indices. Although supporting stock market values is not one of the major considerations there will be some sensitivity over the effects a rate increase will have on equity values.
A month is a long time in the global economy. At the beginning of August, a rate increase in September was on the cards. The deteriorating economic situation in China delayed the Federal Reserve’s decision. On the horizon, we now have Brazil suffering huge economic problems. There are now fears that a contracting Brazilian economy will pull down with it the rest of Latin America. Could this be the next global black spot that delays a 2015 liftoff?