WASHINGTON - Chicago Federal Reserve Bank President Charles Evans defended the Fed's use of "forward guidance" on the direction of monetary policy in a paper released Thursday by the Brookings Institution, but repeated past calls for more specific triggers for changes in the federal funds rate.
Evans, in a paper written with Chicago Fed economists Jeffrey Campbell, Jonas Fisher and Alejandro Justiniano, said past "forward guidance" statements from the Fed's policymaking Federal Open Market Committee have had "significant" effect in lowering both short and long-term interest rates.
But, as he has in the past, Evans and his staffers contend that the FOMC should go beyond merely saying, conditionally, that they expect to hold the federal funds rate near zero "at least through late 2014" and announce specific levels of unemployment and inflation that would cause it to raise rates.
Evans, who dissented in favor of additional monetary easing at the November and December Federal Open Market Committee meetings, has repeatedly argued that the FOMC should declare that it will keep the funds rate near zero so long as unemployment remains above 7% and inflation remains at or below 3%. And the paper reaffirms and seeks to reinforce Evans' argument for specifying conditions for eventual rate hikes.
Evans, a member of Fed Vice Chairman Janet Yellen's subcommittee on communication, and the Chicago Fed economists write that this "7/3 threshold rule" would enable the Fed to "maintain low rates even as the economy begins expanding on its own ... while providing safeguards against unexpected developments that may put the FOMC's price stability mandate in jeopardy."
Evans and his colleagues conclude from their analysis of past Fed statements' market impact that "such conditioning, if credible, could be helpful in limiting the inflationary consequences of a surge in aggregate demand arising from an early end to the post-crisis deleveraging."
They allow for adjustments, though. "Given the extreme persistence of the inflation anchor, if exceptionally low rates were maintained beyond the forecast horizon it is possible that forecasts of inflation would cross its 3% threshold and policy would need to adjust if the 7/3 threshold were in force."
Evans and the Chicago Fed staffers differentiate between what they call "Odyssean" and "Delphic" forward guidance. The former changes market expectations by publicly committing the FOMC to future deviations from its underlying policy rule. The latter can change market expectations by changing views about the economic outlook.
Evans is to present the paper at Brookings later in the afternoon.
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