It can get you into all sorts of trouble, including becoming inconsistent. That has just happened with Chicago Fed Charles Evans. According to Ryan Avent:
THOSE of us who have spent much of the past few years complaining that Federal Reserve policy was too tight to nurture a strong economic recovery are grateful for Chicago Fed president Charles Evans. Mr Evans has made two invaluable contributions to monetary policy-making. He has made himself an open advocate for a more “dovish” policy regime: a departure of sorts within the Federal Open Market Committee, where the loudest voices are nearly always those calling for tighter policy. And he has pushed the committee toward a policy framework that represents a real advance for the central bank. Mr Evans was an early supporter of using numerical thresholds to shape communication about future interest rate decisions. He would swap out guidance suggesting rates would stay low for an extended period or until a calendar date for language relating future interest rate moves to rates of unemployment and inflation, making it much easier for markets to understand what economic conditions the Fed is trying to achieve.
Perhaps more important, Mr Evans’ first pass at the thresholds was surprisingly inflation-tolerant. He reckoned the FOMC should leave rates low until unemployment fell below 7%, so long as inflation remained below 3%. A tolerance for higher inflation may be a critical ingredient in recovery from the sort of recession America faced in 2007-2009, in which deflationary pressures were significant and the Fed’s policy rate was stuck at the zero lower bound. It has been encouraging to watch other FOMC members come around to Mr Evans’ view, and to see Fed policy inch in his direction.
But Mr Evans’ latest speech is a little disconcerting, because it seems to reflect a slightly more inflation-averse perspective. He seems to have moved toward the view of Chairman Ben Bernanke, that the Fed can immaculately boost real growth without any inflationary consequences (or, if you like, “side benefits”).
Why, instead of providing a numerical value for a nominal spending target, did Evans tweak with inflation and unemployment numbers? Now he wants no Fed interest rate action until unemployment comes down to 6.5% and inflation is not above 2.5%. Evans says:
With regard to the inflation safeguard, I have previously discussed how the 3 percent threshold is a symmetric and reasonable treatment of our 2 percent target. This is consistent with the usual fluctuations in inflation and the range of uncertainty over its forecasts. But I am aware that the 3 percent threshold makes many people anxious.
He´s NOT aware, he was made aware! It´s not politically correct for the Fed to mention any rate higher than 2%, ever! That´s become an impregnable firewall. Soon he´ll be down to Kocherlakota´s 2.25%. Maybe that´s the acceptable threshold “margin of fluctuation”.