Chicago Fed's Evans sees rates 'low for quite a long time'

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While it won't be the eight years like the last time the Federal Reserve cut interest rates to the zero lower bound, Federal Reserve Bank of Chicago President Charles Evans said he “doesn’t think there will be reason to raise rates anytime soon.”

“We just came through a long expansion, although we are in a much different environment right now, I think interest rates will remain low for a quite a long time,” Evans said on a virtual conference call on Tuesday morning.

He spoke mostly about the adverse effects of COVID-19 on the economy and presented a baseline case of what he envisions for the remainder of the year.

Federal Reserve Bank of Chicago President Charles Evans
“The relaxing of the stay-at-home policies is a bold decision with pretty high risks," said Federal Reserve Bank of Chicago President Charles Evans.

“As a baseline outlook, it’s reasonable to assume [economic] growth at the end of the year and into 2021,” Evans said. “The pickup in activity will be slow at first, as we ease out of social distancing.”

National data has shown a sharp decline in the economy as unemployment has surged to record highs.

Evans noted Friday’s jobs report will show a double-digit unemployment figure, but he is optimistic about where that number will be by the end of this year and beyond.

“I am forecasting unemployment to be around 9% by the end of the year and envision it being around 5% or 6% by end of 2021,” he said. “The unemployment rate at end of 2020 will be a big marker of how quickly we can come back.”

Although Evans is optimistic about an economic recovery, he warned it is early and while everyone wants this to be over, it is important to be patient and see how the pandemic plays out.

“We face significant challenges ahead, households, businesses and state and local governments have a lot of work to do, but we are up to the task,” he said. “It is reasonable to believe growth will come back in the second half of the year, as long as there is testing readily available.”

He cautioned about the need to work together and continue social distancing and wearing masks to help reduce the infection rate, which is key to reopening the economy.

“The relaxing of the stay-at-home policies is a bold decision with pretty high risks," Evans said.

Non-manufacturing contraction
Activity in the non-manufacturing sector contracted in April for the first time since December 2009, ending a 122-month period of growth, according to the Institute for Supply Management. The non-manuacturing index dropped to contraction territory at 41.8, after a 52.5 reading in March.

“The decline was primarily driven by record lows in the business activity, new orders and employment indexes although new export orders and backlog of orders also dropped,” said Scott Anderson, chief economist at Bank of the West. “Supplier delivery times rose to a record high but that was due to supply chain disruptions and business closures, not to increased demand. Absent the rise in supplier delivery times, the headline index would have declined more.”

The business activity/production index dropped to 26.0 in April from 48.0 in March. The April figure is the lowest on record.

Trade deficit
The international trade deficit rose to $44.4 billion in March from a revised $39.8 billion in February, the Commerce Department reported Tuesday.

Economists polled by IFR Markets expected a $44.2 billion deficit.

March exports fell to $187.7 billion while imports declined to $232.2 billion.

“The global slowdown in trade and travel caused imports to fall 6.2% and exports to decline 9.6%. The largest declines in imports were in autos and consumer goods while the falloff in exports was led by autos and services,” Anderson said. “A slowdown in international travel was responsible for a large portion of the decreases in imports and exports of services.”

He added, the year-to-date trade deficit is 17.8% below year-ago levels as U.S. consumer demand and global economic activity plunged. “The U.S. trade deficit has narrowed for all the wrong reasons this year.”

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