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

''Interest rates that move too high could have a "nonlinear" impact on the economy as businesses become more pessimistic about the future, Chicago Fed President Charles Evans said on Wednesday, mapping out a case for caution in the central bank's battle against high inflation,'' Reuters reported in Tokyo trade:

The Fed currently projects its target federal funds rate will rise to 4.6% next year, and Evans said that "if we have to increase the path of the fund rate much more … it really does begin to weigh on the economy." "I worry that it's sort of a nonlinear kind of impact … with businesses becoming very pessimistic and changing their strategies in a sort of notable way," Evans said in remarks to reporters after an event at the University of Virginia.

Key notes

  • If the Fed pushes the policy rate much further than planned it could start to weigh on the economy.
  • Worried that at some point rate increases could have a "nonlinear" impact, with businesses becoming more pessimistic.
  • Fed "honing in" on the proper level for restrictive monetary policy. 
  • Following Sept. cpi still sees a policy rate next year of 4.5 to 4.75% range as appropriate.
  • Don't think u.s. is embarking on a wage-price spiral, but inflation risk remains to the upside.
  • Low unemployment, and consumer strength still leaves a path for a soft landing, though "closer call than normal".
  • Fed facing hard communications challenge as it approaches a point to slow the pace of rate increases.

Meanwhile, the Fed is expected to lift rates by another 75 basis points when it meets on November 1-2, with an additional 50 basis points or 75 basis points also increase likely in December. 

US dollar update

As for the US dollar, it rallied from two-week lows mid-week with a rise in US Treasury yields that made 14-year highs as investors maintained expectations that the Federal Reserve will continue to aggressively raise rates and is now breaking structure on the DXY daily chart as follows:

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