The U.S. economy is set to look good ‘for quite some time,’ Chicago Fed president says

Following Federal Reserve chairman Jerome Powell’s description of the U.S. economic outlook as “remarkably positive”, market watchers are fielding questions as to how long this rosy period might last.

The answer? Quite some time, in the words of Chicago Fed chief executive Charles Evans — but only if interest rates are hiked to above neutral, which Evans describes as just over 3 percent.

“The U.S. economy is doing extremely well. Fundamentals are strong, the labor market is doing terrific,” Evans told CNBC’s Squawk Box Europe on Wednesday. Indeed, unemployment is currently below 4 percent, its lowest level in 18 years; payroll employment has added more than 200,000 jobs per month and inflation is up to the Fed’s target level of 2 percent.

“I spent quite a long time indicating that I think inflation needs to get up to 2 percent, and here we are,” Evans said. “So I think things are going very well, this is something that can be continued for a number of years, in fact I think that by setting the policy rate just a little above neutral, that will continue to keep things going for quite some time.”

The current federal interest rate is at a range of 2 percent to 2.5 percent, its highest since the 2008 financial crash. The last hike took place on September 26, the eight increase since the Fed began normalizing its historically easy monetary policy in late 2015. The Fed also indicated it would raise rates once more this year and three times in 2019, and dropped language saying its policy would “remain accommodative.”

The move underscored policymakers’ optimism on the U.S. economy, stemming from positive data including an FOMC estimate that upwardly revised the 2018 gross domestic product forecast to 3.1 percent from a prior projection of 2.8 percent. But by 2021, the forecast was reduced to 1.8 percent, indicating less confidence for the economy’s long-term strength.

The FOMC indicated one more increase in 2020, bringing the median range to 3.4 percent where it’s expected to stay through 2021 before settling to 3 percent over the longer run.

The combination of low unemployment and low inflation are fueling hopes for an extended expansion, which Evans believes can be sustained with rate hikes that are less restrictive. Normally, low unemployment and rising wages would trigger inflation to rise, forcing the Fed to raise rates faster.

“It’s only in the last 15 years or so that the Fed has been able to achieve our 2 percent inflation objective in a competent fashion,” the economist pointed out.

“Long-term inflation expectations are now, in my opinion, a little bit too low. We don’t need to fight that battle, so we don’t have to raise the funds rate as restrictively as we may have in the past. That allows us to set, if the outlook continues to be as good as it is, at a slightly restrictive level and then hold there for quite some time until we begin to see signs that we need to make an adjustment.”

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