"We Have Accepted Your Deposit" as Opposed to "We Have Borrowed Your Money"
Liveblogging World War II: August 30, 1941

Charles Evans of the Chicago Fed is a Mensch, and He Sees the Situation Clearly

Robin Harding reports:

Fed official makes plea for more stimulus: A leading Fed policymaker made an aggressive call for more monetary stimulus on Tuesday as it emerged that staff of the US central bank have permanently cut their growth forecasts. In an interview with CNBC, Charles Evans of the Chicago Fed said that he would “favour more accommodation” and became the first policymaker on the rate-setting Federal Open Market Committee to explicitly countenance letting inflation rise above the Fed’s target of 2 per cent in the short-term. “If 1 per cent was not a catastrophe, 3 per cent is not a catastrophe,” said Mr Evans. Ben Bernanke, Fed chairman, has strongly resisted all calls for temporarily higher inflation. Mr Evans is one of the most dovish members of the FOMC but his comments show the extent of division between hawks and doves at the central bank.

Minutes of the FOMC’s August meeting – which forecast that interest rates will stay exceptionally low until mid-2013 – showed the Fed’s staff had cut growth forecasts for the rest of 2011 and 2012 “notably”. More important, recent revisions to past growth data “led the staff to lower its estimate of potential [gross domestic product] growth, both during recent years and over the forecast period”. Mr Evans argued that the mid-2013 commitment did not go far enough. “I favour being much clearer and [more] specific about the economic markers that it would take in order for us to alter that,” he said. He added that this could mean a promise to keep rates low until unemployment fell from its current level of 9.1 per cent to 7.5 or even 7 per cent, as long as medium-term inflation stayed below 3 per cent. The minutes, however, showed that only a “few” FOMC members supported this approach.

Other easing options pointed out by “some” participants included further asset purchases – in effect a “QE3” programme, or third round of quantitative easing – or switching the Fed’s holdings towards longer-term assets. The minutes revealed that a “few” FOMC members, likely to include Mr Evans, had pushed for even stronger action in August but were willing to accept the mid-2013 guidance “as a step in the direction of additional accommodation”. That balanced out the three FOMC members who dissented. One of those dissenters, Minneapolis Fed president Narayana Kocherlakota, said in a speech on Tuesday that the Fed could “lose control of inflation” if monetary policy was too loose, forcing it to jack up interest rates. He argued that with unemployment falling and inflation rising, monetary policy was already as loose as it could be without risking a rise in inflation above 2 per cent.

As I have said before, it is hard to understand who Narayana Kocherlakota is talking to--in the sense that it is hard to imagine anybody who knows about the issues finding his arguments credible. There is no requirement in the Federal Reserve Act that the Federal Reserve never "risk" a rise in inflation above 2 percent. There is a requirement for price stability--and right now prices and demand are unstable downward in the sense that both are far below the values that everybody making plans back in 2007 counted on their being right now. It is not just that Kocherlakota and company are ignoring the employment and purchasing power parts of the Federal Reserve's dual mandate--they are ignoring the "price stability" part as well.

I must say if I were on the Federal Reserve Board of Minneapolis's Board of Directors right now, I would have a duty to find a President for the Bank who understood and would follow the Federal Reserve's dual mandate...