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In the Media | April 2014

Chicago Fed's Evans: Monetary Pol Less Aggressive Than Needed

By Brain Odion-Esene
MNI | Deutsche Börse Group, April 9, 2014. All Rights Reserved.

WASHINGTON (MNI) -–Chicago Federal Reserve Bank President Charles Evans Wednesday accused the central bank of being "timid" in its attempts to spur faster economic growth, saying the Fed has been "less aggressive" than called for despite being nowhere its employment and inflation goals.

In remarks prepared for delivery at the Levy Institute's Hyman Minsky conference, Evans warned that the tentative approach to bolstering the economic recovery could leave it susceptible to unforeseen shocks, and called instead for the Fed to keep most of its ultra-easy monetary policy in place "for some time."

"Generally, the evidence points to a still weak labor market. We still have some ways to go to reach our employment mandate," said Evans, who will vote on the policymaking Federal Open Market Committee in 2015.

As for the Fed's price stability mandate, he said he sees an economy that points to below-target inflation for several years, which underscores the need for easy policy.

"Given today's unacceptably low inflation environment and the wealth of inflation indicators that point to continued below-target inflation, I think we need continued strongly accommodative monetary policy to get inflation back up to 2% within a reasonable time frame," he said.

Instead, "the FOMC has been less aggressive than the policy loss function calls for," Evans said, arguing that "in the current circumstances, accountability and optimal policy mean we should be maintaining a large degree of accommodation for some time."

"It certainly seems that the fallout from the financial crisis and persistent headwinds holding back economic activity are consistent with the equilibrium real interest rate being lower than usual today," he added.

Evans said actions that place the FOMC "on a slow glide path" toward its targets undermine the credibility of the Fed's vow to meet its mandates in a timely fashion.

"Timid policies would also increase the risk of progress being stymied along the way by adverse shocks that might hit before policy gaps are closed," he said. "The surest and quickest way to reach our objectives is to be aggressive."

This also means the FOMC should be open to the idea of overshooting its targets in a manageable fashion.

"Such risks are optimal if the outcome of our policy actions implies smaller average deviations from our targets over the medium term. We should be willing to undertake such policies and clearly communicate our willingness to do so," Evans said.

Making his case for why the economy still needs continued, aggressive monetary policy, Evans said March's 6.7% unemployment rate is still well above the 5.25% percent rate that he considers to be the longer-run normal. As the jobless rate continues to decline, he stressed the importance of assessing a wide range of labor market data "to better gauge the overall health of the labor market."

These would include quit rates, layoffs and a variety of wage measures, as well as broader measures of unemployment that include discouraged workers and those who would like to work more hours.

Evans also argued that the decline in the labor participation rate in recent months cannot be ascribed solely to changing population demographics and other factors outside the Fed's control. The end of extended unemployment insurance benefits, among other things, has also likely decreased the natural rate of unemployment, meaning that "the decline in the unemployment rate likely overstates to some degree the reduction of slack in the labor market over the past year."

On the inflation front, Evans noted that the United States is not the only country struggling with below-target inflation, and that "it is difficult to be confident that all policymakers around the world have fully taken its challenge onboard."

"Persistent below-target inflation is very costly, especially when it is accompanied by debt overhang, substantial resource slack, and weak growth," he added.

Given the low inflation environment, Evans said he is "somewhat exasperated" by those who constantly warn that higher inflation "is just around the corner."

For one thing, he argued that unless there is an unexpected, and positive, shock to the global economy, commodity prices are unlikely to fuel a strong increase in inflation.

To those worried about the inflationary risks posed by the Fed's swollen balance sheet and the massive amounts of excess bank reserves, Evans countered that banks so far have not been lending these reserves nearly enough to generate big increases in broad monetary aggregates.

Even if lending did pick up, he added, "Dramatically higher bank lending would surely be associated with higher loan demand and a generally stronger economy. Strong growth and diminishing resource slack would be part of this story, and a rising rate environment would be a natural force diminishing the rising inflation pressures."

The slow rate of wage growth is another cause for concern, Evans said, as it is "symptomatic of weak income growth and low aggregate demand."

"At today's 2% to 2.25% compensation growth rates and labor's historically low share of national income, there is substantial room for stronger wage growth without inflation pressures building," he said.

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