It’s good to see that at least one person involved in American monetary policy recognizes that money is too tight, as Chicago Fed President Charlie Evans calls for additional monetary stimulus. Evans says the Fed should give more policy guidance and promise to maintain ultra-low rates until unemployment falls below 7 percent or medium-term inflation expectations go above 3 percent. This would be much better than the current posture of policy, which is simply vague and confusing. It is, however, worth emphasizing how timid even Evans’ bold posture is.
Recall that under Gerald Ford and Jimmy Carter, people thought inflation was a big problem. Then Paul Volcker raised interest rates, Ronald Reagan was elected president, we had a brutal recession, inflation was tamed, and from 1985 through to the election of George H.W. Bush it was “morning in America.” Throughout that Morning in America period, inflation averaged 4 percent. Then during the 1990s and 2000s, the Fed seemed to target 2 percent inflation. Then for a while after the 2008 crisis, inflation dipped below that level. Now the most dovish extremist we know of on the Fed is saying we could have a temporary surge up to three before we make money tighter. Why not a permanent return to Reagan-era levels of inflation? Putting a 3 percent inflation ceiling on the country in its current state is still pretty restrictive.