Forecasting "extremely sluggish" growth in the second half of 2008, Chicago Federal Reserve Bank President Charles Evans offered a bleak near-term economic outlook, describing what he terms a "three-front conflict" for policymakers.
Although the economic outlook has improved somewhat since the beginning of the year, inflation risks have gotten worse, he said. The slowing economy, rising inflation, and turbulent credit markets are all threats to economic stability, Evans noted, and present the FOMC with "substantial challenges" in formulating appropriate monetary policy.
In the most recent FOMC outlook, participants continued to see downside risks for growth as well as higher core inflation as soaring energy and food prices take their toll. However, Evans said in his remarks that downside risks to growth and upside risks to inflation have increased.
"Since these forecasts were made, I think the risks for growth have increased and the risks for inflation remain elevated and a concern," he said. "The detail underlying the GDP data and recent numbers for July point to some weakness in growth, particularly after the effects of the recent tax rebates recede."
The depressed housing and auto markets, ongoing financial turmoil and soaring inflation putting pressure on already strapped consumers "have added layers of complexity to the management of monetary policy," Evans said in prepared remarks delivered before the McLean County Chamber of Commerce in Bloomfield, Illinois.
Evans noted the "sharp contraction" in housing markets that has dragged on since 2006 and the significant negative impact it continues to have on GDP. However, he noted that the latest GDP data offered a sliver of hope that perhaps the corner will be turned in the near future.
"Although it is too early to say we are nearing the bottom of the housing cycle, in the most recent quarter residential investment reduced real GDP growth by a smaller magnitude—about two-thirds of a percentage point," Evans said. "As any economist will tell you, 'less bad' can be a first step toward improvement."
The Chicago Fed President noted that weak labor markets, high food and energy prices, and the housing slump have put consumers under pressure, harming the economy.
However, he also noted the bright spots in the economy, including export growth at the hand of the weak dollar that has cut the trade deficit, as well as continued productivity growth. These factors helped produce a positive second quarter GDP, which at its initial reading was up 1.9 percent. Evans noted that recent data suggests the figure will "likely be revised up."
While the economic picture has improved from what he thought it could be in January, the inflation outlook has deteriorated due to some "unfavorable developments," Evans said.
"At the beginning of the year I expected the inflation picture to be better than it is now," Evans noted.
The 2.3 percent reading for core inflation in June was a source of concern for Evans, who said the he viewed the "persistently high rates of overall and core inflation as important concerns for monetary policy."
"I tend to view price stability as core inflation being in the narrow range of 1-1/2 to 2 percent, and the more volatile overall inflation rate also averaging in this neighborhood over longer periods of time," he explained.
However, the combination of inflation pressures and growth risks has made it "difficult to appraise the current situation and project the economy's likely future course," he recognized.
"The current monetary policy environment is even more complicated than usual," Evans said, referring to the current situation as a "three-front conflict."
In a stagflation-like scenario, the Chicago Fed President noted that weak real activity combined with rising inflation with a splash of credit market constriction has created a challenge for the FOMC to meet its dual mandate.
"While energy and commodity prices have moderated somewhat, both headline and core inflation remain high," he noted, adding that inflation expectations remain "uncomfortably elevated."
Referring to the 2 percent Federal Funds rate as "accommodative," Evans noted that it is "not especially stimulative."
"And while the second half of 2008 will likely be extremely sluggish, the risk of a severe slowdown seems less likely today than predicted at the beginning of the year," he added. "In addition, as I also noted, there is clearly an increased risk to inflation."
Evans concluded his remarks on a hawkish tone, indicating inflation may soon overtake economic growth risk as the more pressing issue.
"To date, relatively accommodative monetary policy has taken out insurance against downside risks of disorderly financial adjustment turning into a severe economic downturn," he said. "But rising inflation risks at a time of economic weakness present some difficult challenges for policy."
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December 26, 2025 08:42 ET Third quarter economic growth data from some major economies including the U.S. were the main news in this holiday shortened week. GDP growth and industrial production data from the U.S. helped to boost morale, while the consumer confidence survey results were less upbeat. In Europe, the quarterly economic growth data from the U.K. drew attention, while the minutes of the Australian central bank’s latest policy session was in focus in Asia.