Must-Read: Charles Evans: Thoughts on Leadership and Monetary Policy

Must-Read: Three people so far have told me that Chicago Fed President Charlie Evans’s “Leadership” speech is superb, and the kind of speech that the Fed Chair really ought to be giving these days–what with 10-year Treasury rates kissing 2%/year and the 10-year inflation breakeven below 1.5%/year:

Graph 10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Charles Evans: Thoughts on Leadership and Monetary Policy: “Sometime during the gradual policy normalization process…

…inflation begins to rise too quickly. Well, we have the experience and the appropriate tools to deal with such an outcome. Given how slowly underlying inflation would likely move up from the current low levels, we probably could keep inflation in check with only moderate increases in interest rates relative to current forecasts. And given how gradual the projected rate increases are in the latest SEP, the concerns being voiced about the risks of rapid increases in policy rates if inflation were to pick up seem overblown.

Furthermore, as I just outlined, there is no problem in moderately overshooting 2 percent. After several years of inflation being too low, a modest overshoot simply would be a natural manifestation of the Federal Reserve’s symmetric inflation target. Moreover, such an outcome is not likely to raise the public’s long-term inflation expectations either — just look at how little these expectations appear to have moved with persistently low inflation readings over the past several years. So, I see the costs of dealing with the emergence of unexpected inflation pressures as being manageable.

All told, I think the best policy is to take a very gradual approach to normalization. This would balance both the various risks to my projections for the economy’s most likely path and the costs that would be involved in mitigating those risks.”

October 1, 2015


Brad DeLong
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