Chicago Federal Reserve Bank President Charles Evans on Thursday suggested that “extraordinary accommodation” and a period of elevated inflation will be integral to the U.S. central bank’s approach to fighting the next severe economic downturn.
In remarks to a central banking conference sponsored by the Global Interdependence Center and Banco de México, Evans did not address the current stance of U.S. monetary policy or the economic outlook.
Instead he discussed the implications of sluggish economic growth and a related decline in the level of interest rates suitable for a healthy economy, both of which are conspiring to push down on inflation. That in turn pinches the Fed’s ability to respond to economic shocks with its traditional policy-rate lever, because interest rates can only be cut so far before they reach zero.
Central banks globally are working on new ways to fight shocks amid the constraint of that so-called effective lower bound (ELB) for rates. The Fed expects to put forward ideas from its own year-long policy framework review by mid-year.
“When confronted with the ELB, policymakers must commit to provide extraordinary accommodation in order to meet their mandate,” Evans said in a summary of his remarks provided by the Chicago Fed.
And to counter the tendency for inflation to be low, he said, the Fed must “convey to the public that periods with above-target inflation are essential to achieving the dual mandate goals over the long run,” Evans said.
As Evans prepared to speak, traders of futures tied to the Fed policy rate were betting the Fed may need to take such action sooner than expected to counter the effects of the spread of the coronavirus globally. Traders are now betting the Fed will begin cutting rates again next month and will take them down below 1% before the end of the year.
Echoing what is now a standard line from Fed policymakers, Evans said that in fighting future recessions the Fed “must be prepared to rely on unconventional tools, such as quantitative easing and forward guidance, to provide adequate policy accommodation when appropriate.”
But fighting future recessions will also need some adjustments to the very way the central bank approaches policy setting, he suggested.
Evans said one approach that could help the Fed fight low inflation would be to adopt a target for an inflation range, but only if it asymmetrically tolerates inflation above 2%.
A symmetric band of tolerance around 2% that allows equally for below-target misses as for above-target overshoots should be rejected, he said.
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