MNI POLICY: Evans: Fed Needs Period of Above-Target Inflation

--Chicago President's Speech Gives No Outlook on Rates, Coronavirus

By Greg Quinn

     (MNI) - Chicago Fed President Charles Evans said Thursday the U.S. should

commit to keeping inflation above target for periods of time following weakness

and embrace extraordinary tools like asset purchases and forward guidance.

     Those moves would help in an era where inflation persistently lags the

Fed's goal, Evans said in the text of a presentation he's giving Thursday in

Mexico City. The risk of entrenched weak inflation is heightened by interest

rates being much closer to zero, a situation unlikely to change anytime soon, he

said. 

     "Countering the ELB (effective lower bound) inflation bias may require more

periods of above-target inflation than experienced in the past. Policymakers

must recognize this and convey to the public that periods with above-target

inflation are essential to achieving the dual mandate goals over the long run,"

Evans said.

     "Policymakers must be prepared to rely on unconventional tools, such as

quantitative easing and forward guidance, to provide adequate policy

accommodation when appropriate," Evans said.

     The remarks add to views of other Fed officials suggesting that average

inflation targeting is the best way to bolster monetary policy effectiveness in

any future downturn, ahead of a toolkit review due around midyear. Other central

banks like the BOJ and ECB are struggling to revive their economies even after

years of using negative interest rates and quantitative easing. 

     Evans said his own preference is to target a point estimate of inflation

rather than a range, because that is easier to communicate to the public. The

FOMC in January discussed a proposal whereby they would target an inflation

range with 2% at or near the lower bound after a period of below-2% inflation,

but did not make any decision. 

     Extraordinary policies should be used "during and after ELB episodes,"

Evans said in his presentation titled "Countering Downward Bias in Inflation."

     His remarks didn't give a near-term outlook on the Fed's policy rate or the

impact of China's coronavirus outbreak.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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