Fed’s Evans: Managing Unemployment Under 5 Percent While Curbing Inflation Would Be ‘Good’ Outcome

Chicago Federal Reserve Bank President Charles Evans looks on during the Global Interdependence Center Members Delegation Event in Mexico City, Mexico, on Feb. 27, 2020. Reuters/Edgard Garrido

If the Federal Reserve manages to rein in inflation while sustaining unemployment levels under 5 percent, that would be considered “good,” said Charles Evans, president of the Federal Reserve Bank of Chicago, on Wednesday in remarks at the University of Virginia.

Based on policy projections outlined after the September Fed meeting, interest rates targeted at 4.6 percent and unemployment at 4.4 percent could suggest that the economy “doesn’t actually go into a recession,” and if the unemployment level is below 5 percent, “that would be pretty unusual and good,” Evans said.

The Fed is expected to raise rates by another 75 basis points, for the fourth straight time, in the coming weeks, after calling for continued rate hikes until there is a cooling of inflation. The increases in interest rates will make borrowing difficult for businesses and lead to slower economic growth with a likely uptick in unemployment.

The unemployment rate in the country fell to 3.5 percent in September from 3.7 in August, signaling a positive change in job growth.

However, as Fed officials increase the benchmark overnight lending rate, currently in the 3.00–3.25 percent range, nearer to the 4.50–5.00 percent range in an attempt to curb price pressures, there are market indications that employers are preparing for an upcoming downturn.

The Federal Reserve Bank of Philadelphia stated: “Contacts described a heightened expectation of a recession, and businesses intensified preparations for a downturn. Multiple firms instituted a hiring freeze, others initiated planning for layoffs if business conditions did not improve, and one firm noted broad-based layoffs were already under way.”

Direct and Indirect Effects on Economy

The raise in rates could have a “nonlinear” impact on the economy, said Evans to reporters after the university event, referring to businesses contracting in preparations for a slump in growth.

Regarding the 4.6 percent projected federal funds rate hike in 2023, Evans said, “If we have to increase the path of the funds rate much more ... it really does begin to weigh on the economy.”

“I worry that it’s sort of a nonlinear kind of impact ... with businesses becoming very pessimistic and changing their strategies in a sort of notable way” once rates reach a certain point.

As present, higher rates have affected the housing markets, as demand for mortgages has fallen to a multi-decade low and mortgage applications have fallen for four straight months, with the current level being the lowest since 1997.

Economists are looking at a decline in home prices, with the national median existing single-family home price projected to decrease by 5.5 percent next year.

The Fed commented during its late-September meeting that inflation remains “unacceptably high” and that policies undertaken to control price hikes will hamper economic growth and lead to a weakened labor market.

Policy officials defended their aggressive policy moves, claiming that the effects of rate hikes outweigh the “far greater economic pain” associated with high inflation.