Chicago Federal Reserve Bank President Charles Evans said Monday that the Fed needs to take a “balanced” and “symmetrical” approach to making monetary policy, while recognizing its “limitations.”
The Fed has a statutory “dual mandate” to achieve both maximum employment and price stability, but it hasn’t been easy for the Fed to attain those objectives in recent years, Evans said.
In trying to spur recovery from the financial crisis and avoid excessive disinflation, Evans said the Fed has had to contend with household “deleveraging” or debt reduction; a variety of “global risks,” and an “unusually restrictive fiscal policy.”
What’s more, monetary policy has been “constrained by the zero lower bound” for the federal funds rate, Evans pointed out in materials prepared for a presentation at the Columbus State University in Columbus, Georgia, .
The funds rate has been targeted near zero since December 2008, forcing the FOMC to resort to “unconventional” forms of monetary stimulus: large-scale asset purchases or “quantitative easing” and “forward guidance” on the future path of the funds rate.
Looking ahead, with the FOMC scheduled to meet next Tuesday and Wednesday, Evans laid out three principles for the FOMC to follow.
First, he said, the FOMC should take a “balanced approach to deviations from goals.” That reflects the FOMC’s own past statements.
“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent,” the FOMC declared most recently on Jan. 29.
Second, “inflation preferences should be symmetric,” said Evans, apparently reflecting the widely held belief that inflation should not be either too high or too low relative to the FOMC’s 2% target.
Currently, inflation is running nearly a full percent below that target, and on Jan. 29, the FOMC reiterated that “inflation persistently below its 2% objective could pose risks to economic performance.”
For more than a year, the FOMC has said it will not consider raising the funds rate so long as forecasted inflation does not exceed 2.5% and inflation expectations are “well anchored.”
The FOMC’s other “threshold” for considering rate hikes has been a decline in the unemployment rate to 6.5%.
But, as Evans noted, with unemployment now very close to that threshold, the FOMC has said since December that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”
The FOMC is expected to discuss a new form of forward guidance next week.
Evans’ final standard for future monetary policy is that the FOMC “must recognize limitations of monetary policy during episodes in which real cycles dominate.”