Low inflation will not stop the Federal Reserve from beginning to shrink its $4.5 trillion balance sheet next month, but will likely force it to delay further interest-rate hikes until December or even beyond, a U.S. central banker said on Wednesday.
“I personally think that it would be quite reasonable to (begin trimming the Fed’s balance sheet) in September on the basis of the data that I’ve seen so far, even with the potentially temporary lower inflation data,” Chicago Federal Reserve Bank President Charles Evans said in an interview at the bank’s headquarters.
But while Evans has supported both of the Fed’s rate hikes this year, a third remains a subject for discussion.
“What I’ve just outlined would put on the table in December possibly one increase, but if you thought that inflation was weaker and we needed more accommodation you could decide to put that off until later,” said Evans, who has a vote on the Fed’s policy-setting committee this year.
PG View: Even quantitative tightening into a weak economy poses risks . . .