Although the economy is likely to improve in 2021, inflationary pressures are expected to be minimal which means interest rates are not expected to rise anytime soon. That is how Charles Evans, president of the Federal Reserve Bank of Chicago since 2007, summarized the economic outlook during a 45-minute question-and-answer session hosted by the bankers associations in Wisconsin and Indiana on Jan. 7. Organizers said more than 1,000 people listened in on the virtual event.
Evans projected 4 percent GDP growth in 2021. He said by the end of the year, he expects the unemployment rate to drop to 5 percent, down from its current level at 6.7 percent. He said he doesn’t expect inflation to ramp up sufficiently to warrant an interest rate hike until 2024. Evans referenced the Fed’s inflation target of 2 percent, saying “we have been under-running our target and we need to make that up.” He said he doesn’t expect the Fed to raise its Fed Funds rate from the current 0-25 basis points until inflation exceeds 2 percent.
Evans said the banking industry entered the pandemic on solid footing, with capital levels at robust levels. “Banks have been a source of strength through the pandemic,” he said. Banks in the Midwest face a challenging environment, but he said community banks are finding good loans, despite going up against the largest banks, which have competitive advantages.
Among the threats to the economy in the near term, Evans said, is the pace of the rollout of the vaccine. He said the pandemic has been very hard on students, making learning at the early grade levels more difficult. “I am worried about the education shortfall,” he said. “Many kids have fewer options for going to school… that could have long-lasting effects.”
In a separate press conference after the event, Evans said he expects the Fed to “remain accommodative even if unemployment goes down.” He said he will need to see actual inflation before being willing to increase interest rates. He said he worries about the economy “going through a period of austerity as we did in 2011,” although he said that is perhaps less likely with the new administration and the change in control of the Senate.