Fed’s Evans sees low inflation, no rate hikes in the near term

Bonds

Inflation will likely remain below the Federal Reserve’s 2% target, so there’s no reason to raise interest rates anytime soon, according to Federal Reserve Bank of Chicago President Charles Evans.

“I see U.S. unemployment falling to only to 6.5% by the end of next year,” said Charles Evans, president of the Federal Reserve Bank of Chicago.

Bloomberg News

Low inflation will “be a problem for the next few years,” Evans said during a virtual event hosted by the Global Interdependence Center.

“I see U.S. unemployment falling to only to 6.5% by the end of next year,” he said. “That means that monetary policy will still need to be very easy.” Even if unemployment drops below 4%, recent experience suggests inflation won’t surge.

“I am hard pressed to think of reasons why we would need to move away from accommodative monetary policy unless inflation was well above 2% for an extended period of time, and the economy was just very different from what we are seeing right now,” Evans said. “That doesn’t seem to be very likely.”

Housing starts
Housing starts soared 17.3% in June to a seasonally adjusted 1.186 million annual rate from an upwardly revised May pace of 1.011 million, according to the Commerce Department. The May rate was originally reported as 974,000. Year-over-year starts are down 4.0% from a June 2019 pace of 1.235 million.

Building permits increased 2.1% in the month to a seasonally adjusted 1.241 million annual rate from May’s unrevised 1.216 million pace, and are 2.5% below the June 2019 level of 1.273 million.

Economists surveyed by IFR Markets expected 1.167 million starts and 1.280 million permits in the month.

“The concern going forward is demand may be short-lived as COVID-related job losses work their way through the economy,” said Yelena Maleyev, associate economist at Grant Thornton. “The specter of the pandemic threatens construction activity even though demand has picked up; construction sites in the Northeast and Midwest stalled as workers became ill and projects were cancelled, even though most states designated construction an essential activity. States caught up in the recent surge of COVID-19 cases and hospitalizations — California, Arizona, Florida, Georgia and Texas — account for almost half of total building permits in the country.”

While housing could leadthe economic recovery, “headwinds are accelerating. White-collar workers survived the initial round of temporary layoffs though some suffered wage losses or cuts in hours,” Maleyev said. “The next round may be more severe as businesses grapple with the demand shock that is unlikely to recover before a vaccine is available.”

“Homebuyers have swiftly moved into the market to take advantage of the unimaginably low mortgage rates,” said Lawrence Yun National Association of Realtors chief economist. “But inventory is lacking with a sizable backlog of buyers getting outbid by others.”

Michigan sentiment
The University of Michigan’s preliminary consumer sentiment index for July fell to73.2 from the final june 78.1 reading.

Economists predicted the index to be 79.0.

The current conditions and expectations indices also declined in July. The current conditions index fell to 84.2 from 87.1 and the expectations index moved lower to 66.2 from 72.3.

The one-year inflation expectation rose to 3.1% from 3.0% last month, while the five-year expected inflation level rose to 2.7% from 2.5% last month.

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