Fed’s Evans Sees September Balance Sheet Move

Chicago Fed President Charles Evans said it would be “reasonable” to announce the beginning of a reduction of the central bank’s balance sheet next month, while cautioning that disappointing inflation data may delay interest-rate increases as technological disruption dampens price pressures.

“The table is set for the recent unusual downward movements in inflation — due to cell-phone data services prices and other factors — receding, and we’ll just have to see how that goes,” Evans told reporters at a media briefing in Chicago on Wednesday.

On the other hand, “people are utilizing newer technologies, competition is emerging from unexpected places — not necessarily your nearest competitor but somebody else — and that could lead to reduced margins and downward price pressure for some period of time,” he said.

Fed officials meet Sept. 19-20 in Washington and are expected to announce the start of a gradual process to shrink their $4.5 trillion balance sheet by phasing out reinvestment of proceeds from maturing bonds. The chances of another rate increase this year, on the other hand, are only about one in three, according to prices of federal funds futures contracts.

Evans, who has argued more forcefully than many of his colleagues in recent years that interest rates should be kept low due to low inflation, said U.S. central bankers “should be very careful in assessing the future moves” because “each policy move does make you wonder if policy continues to be accommodative.”

“We might be pretty close to neutral,” he said. “The economy is doing very well, but inflation might have some trouble getting up to 2 percent.”

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Still, a move to begin shrinking the balance sheet makes sense because it probably won’t have a big impact on financial markets or the economy, and “I personally think that it would be quite reasonable to do that in September, on the basis of the data I’ve seen so far,” he said.

Weak Inflation

Recent government reports have shown a 0.4 percentage-point deceleration since January in the rate of so-called core inflation, a measure that strips out volatile food and energy prices. That is pushing inflation further below the Fed’s 2 percent target. A large part of the decline, to 1.5 percent in the 12 months through June, came from a sharp drop in the price index for wireless services, due to changes Verizon Communications Inc. made to the mobile-phone plans it offers.

Evans cited that, as well as the recent Amazon.com Inc. acquisition of Whole Foods Market Inc., as examples of industry disruptions that have weakened the traditional link that economists draw between labor-market strength, wage growth and price pressures.

“As the unemployment rate continues to improve, and businesses tell you that they are having trouble hiring workers, I think eventually that translates into higher wages, and then the question is whether or not they are able to pass along those cost increases in the form of higher prices.”

For now, the uncertainty created by evolving business models is also probably leading to reduced demand for credit despite low borrowing costs and high stock-market valuations, Evans said.

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Businesses have “worked hard to get their balance sheet in place. They are ready to take advantage of opportunities that present themselves, but I think that there is a lot of uncertainty as to where those opportunities really lie,” he said.