Charles Evans on Experience with Monetary Policy in a Low r* World

Video

On Thursday, September 30, Charles Evans joined Markus’ Academy for a lecture on Experience with Monetary Policy in a Low* World. Evans is the President and Chief Executive Officer of the Federal Reserve Bank of Chicago.

Watch the full presentation below.  You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

• [0:00] Introductory remarks
• [1:35] Doesn’t inflation seem more persistent than temporary? Price levels since the onset of the pandemic have been higher, with some industries feeling the effects more than others. Inflation is expected to come down in some industries, but price levels could stay higher than pre-pandemic, meaning that inflation indicators will not show the difference in purchasing power for consumers. Supply shocks have been long lasting (could be upwards of a year from now), and a good indicator may be –oddly enough– looking at prices: industries like used cars, plane tickets, and more can show the return pre-pandemic levels. Wages have been increasing, but it is hard to tell based on confounding variables like the trends towards working from home, different jobs, and greater virtual interaction.
• [13:56] It is difficult to monitor changes in inflation expectation, partially because inflation experience in recent years has been so consistently low. Inflation expectations are not getting out of control, but unclear whether they are still at the 2% long term. Consumer surveys show differing views of US inflation, but it is necessary to look at a variety of indicators in order to see the full picture. Inflation disagreements exist about whether monetary policy is focused on the right objectives, showing that people do not always agree on how to deal with the 2% inflation anchor. 

• [23:19] Is the Phillips curve relatively flat, until the inflation anchor breaks? The Phillips curve is widely contested, but it seems to be that inflation has not been very responsive to the labor markets. For the last few decades, we have not seen higher inflation, despite declining. . 

• [34:07] With flexible average inflation targeting (FAIT), the FOMC allows for greater discretion as they aim for their average goal of 2%. The window over which the average is taken is not specified yet. Furthermore FAIT is asymmetric: If the FOMC finds themselves undershooting for any extended period of time, they are prepared to overshoot to compensate, but without the same worries for combatting high inflation. Excessively high inflation in the past is not compensated by low inflation in the near future. The reason is that we do not know how to deal with low inflation because of the effective lower bound. There is a second asymmetry depending whether the shock comes from the supply or demand side.

• [46:08] How do you see r* – slowly trending or moving over the cycle?  a benchmark that gives some guidance whether policy is as accommodative, neutral, or restrictive, depending on equilibrium real and nominal interest rates. r* has gone all the way to 0% in 2008, but it depends on the real and nominal interest rates; In the early 1990s a 3% interest rate was seen as accommodative, right now would seem very restrictive. The zero lower bound is relevant even if one goes slightly negative. It is possible that in future crises, there could be a negative r* value; however, in 2008 it would have had to have been too negative (perhaps -4%), which would be challenging for bankers. Furthermore, in reality, negative rates are tremendously unpopular.

• [53:31] Are the DOTS valuable or misleading? The DOTS allows for U.S. central bankers to submit projections for the federal funds rate at the end of the year. The DOTS are useful because they allow everyone to see what the FOMC is thinking. Different FOMC members might make different statements even though they have similar projections. The DOTS clarify their opinions. 

• [57:09] Interest on reserves 

• [59:37] FAIT international implications 

• [1:01:53] Doesn’t Fiscal and Financial potentially restrict future tightening?