Charles Evans on Missing the Fed’s Targets

Chicago Fed President Charles Evans spoke at last week’s Minsky conference, and news reports have focused on his comments regarding the expectation that the Federal Reserve will wait at least six months after the end of QE before beginning to raise interest rates (Evans: “It could be six, it could be 16 months”; “If I had my druthers, I’d want more accommodation and I’d push it into 2016,” but “the actual, most likely case I think is probably late 2015”).

But his speech might also be of interest to those who have been following the debate over whether the Federal Reserve is, let’s say, equally passionate about the two sides of its “dual mandate” (price stability and maximum employment). Right now, the Fed is missing both of its ostensible targets, with inflation below 2 percent and unemployment above the Fed’s estimate of the “natural” rate, which ranges from 5.2 to 5.6 percent (for Evans, it’s 5.25 percent). Many have suggested that the Fed appears much more concerned about inflation rising above 2 percent than it does about high unemployment, or below-target inflation, for that matter.

In the video below, Evans shares his view of how the Fed should “score” its hits and misses on unemployment and inflation:

the 9 percent unemployment rate we faced back in September 2011 can be depicted in “inflation-loss equivalent units” by showing the inflation rate that gives an equivalent loss when unemployment is at its sustainable rate. So what is that rate? If unemployment was at its natural rate, what would be the inflation rate that would make you equally uncomfortable as if you were facing the 9 percent [unemployment] rate? The answer is 5-1/2 percent inflation. […]

I think we need continued strongly accommodative monetary policy to get inflation back up to 2 percent within a reasonable time frame. After all, notice that the red and green regions of the bull’s-eye chart [posted below] show modest inflation above 2 percent is much more acceptable than even 6 percent unemployment.

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Here he is on the outlook for inflation:

Despite current low rates, I still often hear people say that higher inflation is just around the corner. I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation. Many times, the strongest concerns are expressed by folks who said the same thing back in 2009, and then in 2010, and … well, you get the picture. […]

[A]nother potential source of inflationary pressures would be rising inflation expectations. Here, I mean a breakout of inflation expectations separate from any fundamentals that might accompany the previously discussed cases of rising commodity prices and stronger bank lending. One could think of this as the spontaneous combustion theory of inflation. The story goes like this: Households and businesses simply wake up one day and expect higher inflation is coming without any further improvement in economic fundamentals. Without appealing to esoteric economic theories of sunspots, these expectations don’t seem sustainable in the current environment.

The rest of the videos of speakers and panelists from the conference will be posted here.