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Fed should be willing to overshoot on goals: Evans
February 28, 2014 / 6:31 PM / 4 years ago

Fed should be willing to overshoot on goals: Evans

Feb 28 (Reuters) - The Federal Reserve’s best bet for returning the United States to full employment and 2-percent inflation is to clearly and repeatedly state those goals and even be willing to overshoot them to get there quickly, a top Fed official said on Friday.

Under Fed Chairman Ben Bernanke, the Fed has used massive bond-buying programs and a promise to keep rates low as effective tools to provide monetary policy accommodation despite having already slashed the main policy rate to near zero, Chicago Fed President Charles Evans told an audience of economic heavyweights in New York.

But with unemployment still too high and inflation undesirably low, he said, the U.S. central bank’s policy-setting Federal Open Market Committee is still falling short on both of its goals.

“If anything, the FOMC has been less aggressive than the policy loss function might admit,” Evans said in remarks prepared for delivery to the University of Chicago’s Booth School of Business conference on monetary policy in New York.

Being clear about policy goals and taking policy action to achieve them is 90 percent of the Fed’s communication battle, he said. But bringing the economy back to health slowly poses risks because of the chance of intervening policy shocks, he said.

The Fed has made it clear that an unemployment rate of about 5.5 percent and an inflation rate of about 2 percent are indicative of a healthy economy, he said.

“The surest and quickest way to get to the objective is to be willing to overshoot in a manageable fashion,” Evans said. “With regard to our inflation objective, we need to repeatedly state clearly that our 2 percent objective is not a ceiling for inflation.”

Evans is one of the Fed’s most dovish policymakers, and though he does not have a vote on the Fed’s policy-setting panel this year, his voice has been an influential one at the table.

Some of Evans’ colleagues advocate adopting rules to set monetary policy, saying that doing so would make Fed policy more effective because markets would know with certainty what it will do.

Evans criticized such an approach, saying that one well-known rule, named after Stanford University Professor John Taylor, failed to deliver appropriate policy prescriptions during the Great Recession and should not be relied upon.

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