Charles Evans, president of the Federal Reserve Bank of Chicago, spoke with Yahoo Finance in New York City on Nov. 6 to talk about the central bank’s third rate cut in 2019 and what lies ahead for Fed policy.
Below is a transcript of his appearance:
BRIAN CHEUNG: Hi, Brian. We are sitting down here with Chicago Fed president Charles Evans here at the Council on Foreign Relations. Thank you so much for joining us this morning.
CHARLES EVANS: Sure. It's great to be here.
BRIAN CHEUNG: So let's talk a little bit about the Fed's decision last week to cut interest rates a third consecutive time by 25 basis points. There seems like there's some indication from Fed speakers and Fed officials that you're on pause for right now.
Do you see that as the case for right now? And if that were to be the case, what would you need to see to maybe make a case for further accommodation down the road?
CHARLES EVANS: Well, I think that the economy is doing quite well at the moment. I think the consumer is very strong. Labor markets are strong. The most recent employment report was quite good, especially with the adjustments, revisions upward in previous months.
So the economy is in a good place, and I think we've made good adjustments to the stance monetary policy. So cutting the funds rate target by 75 basis points-- three cuts, as you mentioned. I think that puts us in a good place.
I'm, at this point, looking at the data, looking for some of the effects of the policies that we put in place, our communication strategy from the beginning of the year that should help support the economy and mitigate risks that we're seeing.
So what am I looking for? I'd like to see inflation pick up, I'd like to see the economy continue to grow, and I'd like to see business investment pick up.
BRIAN CHEUNG: So that the last inflation reading for core PCE was actually at 1.8%. Are you seeing that as a sign that maybe we are getting closer to 2%, or is that just kind of one deviation in one reading that we shouldn't glean too much from?
CHARLES EVANS: Well, I think 1.8% is better than 1.5%. We'd been down at 1.5% not too long ago. And so I think we're moving in the right direction. But getting to two sustainably has been a challenge. We've sort of touched 2.0% before and then fallen back.
And I really think that this is the point in the economic cycle-- we're 10 years into the expansion. This is the time when we ought to be delivering inflation well above 2% in support of our symmetric objective. We should have visited 2% sustainably by this time.
So I think our accommodative stance from our most recent three cuts is helpful for achieving that. My own expectation is that we will get to 2.0% and overshoot just a little bit, completely in line with our symmetric objective. So I think we're in a good place.
BRIAN CHEUNG: So a lot of reference to 1995, 1996 for the current path of insurance cuts. It seems like they also stopped at 75 basis points in '95, '96, as well.
Why is that the template for trying to steer clear of recession right now? Is there a reason to think that because the times are different-- interest rates are about half what they were in '95-- that maybe this is a different time?
CHARLES EVANS: Well, it might just be a coincidence that it's three cuts with the episodes that you mentioned. I would say that what we've just done is an even more substantial reduction, when you take into account that we had an expected path that was going to continue to increase rates in 2019 as of late 2018.
Going into the December 2018 FOMC meeting where we did raise rates by 25 basis points, I expected that we would probably increase rates by three times in 2019. But in fact, we've cut rates three times. So that's 150 basis point turnaround relative to what we had been indicating.
I think that's a pretty substantial adjustment, and I think that it's helpful. And it's just sort of a mid-cycle correction because I don't see that we necessarily have to cut rates more. We'll see all the data come in. We're at a 1.5% to 1.75% point. And I think that'll serve us well, but we want to see how the data play out.
BRIAN CHEUNG: So your district covers Michigan, the lower half of Wisconsin, Iowa. So you have a good view of the manufacturing sector through the first two states and then through farming in Iowa. So what are you seeing in terms of the impact of the trade war? There's this phase one deal on the table right now. Have you seen that maybe that's inspiring some to make the investments that we've seen lagging in the past few quarters?
CHARLES EVANS: We've got Indiana and Illinois, too. And so we've got a healthy amount of automobile manufacturing, auto supplier network. We've got heavy equipment manufacturing on the Western part related to construction equipment, agricultural equipment, and things like that.
So definitely the tariffs have hit the ag sector quite a lot. I think that the additional support payments to the farmers has been helpful for their farm incomes. But I don't think it's changed their attitude enough towards buying that additional farm implement for the next year.
People are doing what they have to do, of course. But I think that that's been definitely a downward risk for that side of it.
Automobiles-- I think getting USMCA passed would be helpful for them, and just getting the trade policy uncertainty to move off to the side and go away would be extremely helpful. So we'll have to see how that plays out.
BRIAN CHEUNG: And lastly, you are a voting member of this year's FOMC. Your last meeting will be December 10 and 11. As you mentioned, a big pivot on the FOMC through this year.
Has it been contentious at times? What is the discussion like in those meetings when you have three members dissenting in the September meeting? Is it kind of a very interesting time, given the tenure that you've had at the Federal Reserve so far?
CHARLES EVANS: Well, we've definitely had good discussions. I would say that it's pretty evident from the dissents, as you mentioned, from our summary of economic projections, and also my colleagues' speeches that we just have different opinions about the appropriate stance of policy.
I think there's generally good agreement on what the economic outlook is. The economic outlook is really quite good.
I think the risk assessment is something that you kind of look at and you kind of go, well, I'm not sure that the economy is going to be dragged down by this. And in fact, we've done so well, it seems really quite resilient. So maybe we don't need to do that. I hear those arguments.
I think we've had very collegial discussions, as we always have. I've been Fed president for now 12 years. We have had far more contentious discussions over that time period when we had disagreements on how much accommodation to put in place during the crisis, how long to put it in place, and things like that.
So this is pretty typical fare, engaging conversations, and I always come away learning more from those discussions than I went in with. So they've been good.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.