A closer look at the Fed’s dovish dissenter
Don’t expect more help from the Federal Reserve — at least not for the time being. In recent weeks, there had been talk among Fed watchers that the central bank might try to jolt the economy further by, say, buying up mortgage-backed securities to support the government’s big refinancing push. But earlier this afternoon, the Fed voted to stay put for now, arguing that the economy had “strengthened somewhat” of late.
There was, however, one dissenter: Charles Evans, the president of the Federal Reserve Bank of Chicago. As Neil Irwin reports, this is the first time in four years a board member has disagreed with Fed policy from the dovish side, arguing that the Fed isn’t doing nearly enough to boost the economy.
So who is Charles Evans? In recent months, he’s been one of the loudest advocates of more monetary stimulus from the Fed. Back in September, for instance, he was arguing that the central bank was much too obsessed with fighting inflation and failing to live up to its dual mandate:
Suppose we faced a very different economic environment: Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.
One point Evans has made is that if the Fed is going to stick with, say, a 2 percent inflation target, then it should be just as likely to overshoot the target (while pursuing higher growth) as undershoot. “I do not think that a temporary period of inflation above 2 percent is something to regard with horror,” he has said. “I do not see our 2 percent goal as a cap on inflation. Rather, it is a goal for the average rate of inflation over some period of time.” In practice, he said, the Fed tends to treat its inflation target as a ceiling, and hence is more likely to err on the side of lower growth.
So what should the Fed do? Here’s an October speech from Evans, in which he argues that the Fed should commit to keeping short-term rates at zero “until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent.” The basic logic goes like this: As the economy starts recovering, it’s likely that we’ll see an uptick in inflation as a result (if, for example, younger workers start moving out of their parents’ houses and rents rise). Evans argues that the Fed should make clear it won’t hit the brakes just because prices are rising, at least not until we’re firmly back in recovery territory. For now, though, Evans still seems to be a minority voice in the bank.