Chicago Fed President Charles L. Evans indicated that the Federal Reserve can 'relatively quickly' reduce inflation without a surge in unemployment and recession despite rate hikes. At the same time, Evans indicated a sensible course of action and a deliberate cycle of further restrictive increases:
- According to Evans, the target rate will rise above 4.5% in early 2023 and will remain unchanged as long as the Fed takes 'stock' of its actions to date;
- Demand for commodities in the U.S. economy remains exceptionally strong. JOLTs data indicate that the labor market is cooling gently but vacancies are still at high, 'pro-inflationary' levels;
- Demand reduction by restrictive policy is needed to bring inflation down to the 2% target. At the same time, according to Evans, long-term inflation expectations in line with the Fed's target look promising;
- Risks to a 'soft landing' according to Evans include the ever-present topic of COVID, the war in Ukraine, a very slow improvement in supply, and overly aggressive monetary policy, putting strain on the labor market without curbing inflation.
The Fed's current forecast is for unemployment to rise to 4.4% by the end of next year, up from 3.5% this September. The market assumes another 75-bp hike on November 1 of this year.
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