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Policy: Economy

Top Fed 'dove' calls for more stimulus

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PennAve,Joseph Lawler,Economy,Federal Reserve,Inflation,Unemployment,Taper

One of the Federal Reserve system's top advocates of looser money is calling for the Fed to continue easing even if inflation rises.

Charles Evans, the president of the Federal Reserve Bank of Chicago, said at a meeting in New York Friday that the Fed to "do more" to boost the economy and let the public know that it won't be deterred by rising inflation. The Fed should "repeatedly state clearly that our 2 percent objective is not a ceiling for inflation," Evans clarified.

Evans is known as a monetary policy "dove" -- more worried about unemployment and less concerned about too-high inflation than most officials at the central bank. It was Evans who first proposed the strategy, later known as the "Evans Rule," of promising that interest rates would remain at zero until unemployment fell below a certain benchmark rate. The Fed put the Evans Rule into practice in December 2012, setting 6.5 percent unemployment as the threshold.

With the labor market having improved since then and the Fed in the process of tapering while inflation remains low, Evans appears to be worried about complacency.

Instead of proposing another rule, however, Evans simply noted that if the Fed were clearer and more forceful about meeting its goals of 2 percent inflation and roughly 5-6 percent unemployment, there would be less need for forward guidance and other unconventional strategies.

Central bankers should respond to high unemployment with as much urgency as they would high inflation, according to Evans. He said that 9 percent unemployment should be thought of the same way as 5.5 percent inflation -- and that all "post-[Paul] Volcker central bankers would respond to 5 1/2 percent inflation as if their 'hair was on fire.'"

Evans also introduced a "bull's-eye scorecard," a chart of inflation and unemployment.



The idea is that the Fed shouldn't miss the bull's-eye in any direction.

Evans also clarified that the Fed's target rate for Consumer Price Index inflation is 2.5 percent, not 2 percent as is commonly thought. That is because the Fed pays closer attention to a different measure, the Personal Consumption Expenditures price index. Inflation, as measured by the PCE index, is consistently lower than in the CPI.



In the chart above, CPI inflation is in red, and has been running above PCE inflation, in blue, throughout the recovery.
In the latest reading, released Friday, PCE inflation was at just 1 percent year-over-year, whereas the CPI currently has it at 1.6 percent.

Evans is not a voting member of the Fed's monetary policy committee this year, but his ideas, such as the Evans Rule, have influenced the Fed's decisions in the past.

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