FOMC Member Evans Calls For More Aggressive Monetary Policy

MoneyNews, April 22, 2014. All Rights Reserved.

Charles Evans, president of the Federal Reserve Bank of Chicago and a leading dove of the Federal Open Market Committee (FOMC), delivered a speech April 9 titled "Monetary Goals and Strategy" to the 23rd annual Hyman Minsky Conference, which is sponsored by the Levy Institute of Bard College and held at the National Press Club in Washington. 

With the exception of me, the modest-sized audience was composed of liberals who follow economic policy very closely and believe that governmental authorities should tinker constantly with the economy in order to improve its performance and the distribution of income. 

The conference honors Minsky as one of the earliest exponents of this view, who propagated it articulately from the earliest years of the permanent and ongoing financial crisis.

Chicago has traditionally been a hotbed of conservative and even hard money economics, especially at the University of Chicago. However, the Chicago Fed under Evans has placed itself firmly in the dovish camp on monetary policy, and in 2015 Evans will rotate into a voting seat on the FOMC, so that he can back his sentiments with a vote. Evans has taught at the University of Chicago, University of Michigan and University of South Carolina, and he received degrees in economics from the University of Virginia and Carnegie-Mellon University, which is a stronghold of conservative monetary scholarship.

What makes Evans’ speech especially significant is that he poses a scholarly challenge to conservative advocates of a monetary rule, particularly in circumstances where the economy has performed so poorly that the federal funds rate has already dropped to the bottom, and he contends that under these conditions, even Milton Friedman would agree that the FOMC should take an aggressive stance in order to keep the economy from slipping into a zone of negative inflation that could cripple economic growth for decades. 

The speech was divided into four parts. First, Evans reviewed the "Three Big Events in Fed History," in his order of importance: 1) The Great Depression (1929 to 1938); 2) The Great Inflation (1965 to 1980); and The Treasury Accord (1951). He defended the independence of the Fed, but accepted in a serious way, not just rhetorically, that with the independence must go accountability.

Second, Evans laid out a three-part strategy for achieving the goals the FOMC has set out during the long term. 

Third, he used bulls-eye charts to demonstrate that the Fed has missed both its employment and inflation targets. 

And finally, he lamented the inability to stimulate the economy by adjusting the federal funds rate once it has reached its lower bound. 

He concluded by advocating that the Fed adopt more aggressive policies now to stimulate growth, even at the risk of exceeding the 2 percent inflation target for some time after the employment target has been reached. 

He criticized as "timid" the stance of most of his colleagues who argue for a slow glide path to the target so as not to risk touching off another bout of inflation.

(Archived video can be found here. A copy of the speech can be found here.)