Evans: Rates moving too high could have ‘nonlinear’ impact on US economy

CHARLOTTESVILLE, Va., Oct 19 (Reuters) – Excessively high interest rates could have a “non-linear” impact on the economy as companies turn more pessimistic, Chicago Fed President Charles Evans said on Wednesday, laying out a reason for caution The The central bank’s fight against high inflation.

The Fed is currently forecasting that its interest rate will rise to 4.6% next year, and Evans said that “if we have to hike the interest rate path a lot more…it’s really starting to weigh on the economy.”

“What I’m concerned about is that it’s kind of a non-linear impact…with companies getting very bearish and changing their strategies in remarkable ways,” Evans said in a note to reporters after an event once rates hit a certain point have University of Virginia.

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Evans’ comments reflect an emerging debate at the Fed over how far and faster to raise interest rates when inflation is still three times the central bank’s 2% target, and there are few monthly signs of progress.

The Fed is expected to approve its fourth straight 3/4 point hike at an upcoming Nov. 1-2 meeting, but then faces a critical decision on whether to slow the pace and give the economy time to to adapt.

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Evans said that even after the latest inflation data showed little progress through September, he believes the Fed’s current forecast for interest rates to range between 4.5% and 4.75% next year is always reasonable is still appropriate.

While risks of high inflation remain “on the upside,” Evans said a rate hike much higher than currently planned could pose risks of its own.

He said the Fed’s current forecast path should slow inflation while the unemployment rate would only rise to about 4.5% next year – which he saw as a “good” result compared to the Fed’s previous inflation struggles.

But he said it is already “closer than normal” to whether the United States can avoid a recession.

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“Unfortunately, inflation is just way too high right now,” Evans said. “We must continue on the path that we have set out … I am confident that will be enough.”

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Reporting by Howard Schneider; Edited by Sandra Painter

Our standards: The Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the Federal Reserve, Monetary Policy and Economics, University of Maryland and Johns Hopkins University graduate with previous experience as a foreign correspondent, economic reporter and local contributor to the Washington Post.

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