Fed's Evans, citing slow growth, says low US rates are here to stay

Chicago (Aug 31)  Federal Reserve Bank President Charles Evans on Wednesday said he is increasingly convinced that U.S. economic growth has slowed permanently, a situation that will keep U.S. interest rates low for a long time ahead.

Embracing Harvard Professor Larry Summers' so-called secular stagnation theory, Evans argued that an aging U.S. population and slowing productivity growth mean there is little reason for interest rates to rise either fast or far.

Expectations of low growth have become so embedded in corporate and investing behavior, he said, that even if inflation rises unexpectedly and the Fed has to raise rates faster than it now anticipates, a detrimental spike in long-term interest rates is unlikely.

"Long-run expectations for policy rates provide an anchor to long-run interest rates," Evans said, according to a detailed outline provided ahead of his remarks to the Shanghai Advanced Institute of Finance in Beijing. "So lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path."


Fed Chair Janet Yellen said last week that with the U.S. economy near full employment and inflation showing signs of rising toward the Fed's 2 percent goal, the case for a U.S. interest-rate hike has strengthened in recent months. Traders responded to those and other somewhat hawkish comments from Yellen's colleagues by adding slightly to their bets that the Fed will raise rates before the end of the year.

Evans, who does not have a vote on Fed policy this year, is known as one of the U.S. central bank's most outspoken doves, generally in favor of delaying rate rises as long as possible so as to encourage hiring and investment.


Although he did not express any view in his prepared remarks on when the Fed should next raise rates, his argument suggests support for patience.

If inflation rose unexpectedly, he said on Wednesday, the Fed could probably tamp it down with something far short of a spike in rates

"If necessary, we could normalize policy much faster than currently envisioned and still keep the pace gradual enough to avoid a disorderly change in financial conditions," Evans said.

Source: Reuters