FORT WAYNE - The Federal Reserve's interest-rate hikes will begin to drag on U.S. economic growth and employment by next year, a U.S. central banker said Friday, as the level of borrowing costs appropriately turns "mildly restrictive" after more than a decade of acting as a stimulant.
The remarks, from Chicago Federal Reserve Bank President Charles Evans, mark a turning point in the thinking of a policymaker who as recently as this past spring argued the Fed should stop raising rates so as to allow inflation to rise to 2 percent.
It also contrasted sharply with the view of his fellow Fed policymaker Lael Brainard, who Thursday suggested rates had room to rise before they would start impeding growth.
In Brainard's view, the Fed can continue to raise rates but still provide an upward nudge to the economy. In Evans' view, it will soon be time to stop boosting the economy.
"The U.S. economy is firing on all cylinders, with strong growth, low unemployment, and inflation approaching our 2 percent symmetric target on a sustained basis," Evans said in remarks prepared for delivery to the Northeast Indiana Regional Economic Forum.
The economy will likely grow at 3 percent this year before slowing next year, he said, pushing unemployment down from 3.9 percent now to 3.5 percent by 2020, well below the 4.5 percent that Evans believes is sustainable over the long run. Meanwhile inflation, he said, will likely rise a bit above 2 percent, though not far enough to cause concern.
The Fed has been raising rates gradually as the economy has strengthened, and its most recent projections suggest it will continue to do so into next year before slowing in 2020.
The projections show most policymakers expect interest rates to rise to 3.1 percent by the end of next year and 3.4 percent by the end of 2020, above the Fed estimate for a neutral rate setting of 2.9 percent, Evans noted. Neutral is the estimated level of borrowing costs that in a healthy economy neither boosts nor brakes growth.
"This means that the 3 to 3.5 percent level of the funds rate projected for 2019 and 2020 is mildly restrictive," Evans said. "Given an unemployment rate forecast below the natural rate, such a policy stance would be quite normal and consistent with some moderation in growth and a gradual return of employment to its longer-run sustainable level."
Policy will, Evans said, respond to circumstance. If uncertainty over trade policy begins to hurt business spending, for instance, the Fed may deliver a shallower path of rate hikes; if the Fed or fiscal policy proves to have been more stimulative than thought then it may need to tighten policy further.
But overall, Evans' message was clear: higher rates by next year will start to restrict growth and employment.