MNI POLICY: Evans Says Fed Should Focus On Outcomes Not Theory

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Chicago President Charles Evans

on Wednesday said the Fed should focus on inflation and employment targets

rather than following theoretical guidelines like the Taylor rule as it sets

policy for a post-crisis economy with a lower neutral level for interest rates.

     He also repeated parts of a speech from earlier this month in which he

called for gradual interest rate increases in light of strong fundamentals and

inflation running close to 2%. Again, he endorsed mildly restrictive interest

rates in 2020 and 2021, saying such a stance was to be expected as growth

moderates and the unemployment rate rises from its current low level.

     The following are the key comments in remarks prepared for the OMFIF City

Lecture in London:

     --The Fed anticipates needing to cut rates to near zero again in a future

downturn, turning again to unconventional policies such as forward guidance and

large-scale asset purchases to bolster the economy. Alternate monetary policy

frameworks such as a higher inflation target or price-level targeting might

better allow it to deal with those challenges. Evans said he could not yet

endorse any particular framework.

     --The key criterion in judging policy frameworks is "the ability to deliver

on the central bank's mandated policy goals" of maximum employment and price

stability. That calls for outcomes-based policy rather than adhering to

theoretical prescriptions like the Taylor Rule.

     --Price-level targeting frameworks, in which the central bank would

compensate for periods of lower-than-targeted inflation by pushing it above

target for a time, would face practical challenges, including that of convincing

the public that these higher rates of price rises were temporary.

     --Strongly accommodative monetary policy can lead to financial stability

risks and require more stringent regulation, something that must also be

discussed as the Fed considers other policy frameworks.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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