The minutes of the August Federal Reserve Open Market Committee meeting released yesterday make it clear that the FOMC was closer to recommending more forceful stimulus measures than a simple read of the August statement led me to believe. It’s also been revealed that the FOMC has agreed to hold a special extra-long two-day meeting in September in order to have adequate time to fully discuss the different options for additional stimulus. That seems like a clear sign that Chairman Bernanke favors additional action and wants to make sure that he has time to build consensus on the committee for it rather than letting doubts about specifics cloud the issue.
This seems like a good time to revisit Chicago Fed President Charlie Evans’ proposal to stimulate with extra guidance which I was perhaps a bit too hasty in talking about. Roughly speaking, I think this is exactly the kind of thing the Fed should be doing. His proposal is that the Fed should say that they’ll keep rates super-low and be willing to tolerate inflation of up to 3 percent until unemployment falls below 7 percent. This is basically a back-door NGDP target. For various reasons that I don’t find persuasive, many well-qualified people seem uncomfortable with the idea of the Fed directly promising to create more inflation or more NGDP in part because they think the central bank might fail to hit the target. Consequently, they’re more comfortable with this Evans-style language about willingness to tolerate a higher inflation rate. In my view, these are basically equivalent. The Fed saying it will accept higher inflation unless a supply side miracle suddenly delivers 7 percent unemployment without any increase in the price level is, to me, identical to the Fed targeting a higher inflation rate.
The only real problem with Evans’ proposal is that it’s too timid for my taste. Why not tolerate inflation of up to Reagan-era 4% levels unless unemployment goes all the way back down to 5 percent, at which point the Fed will start targeting at 3 percent? But honestly at this point any kind of real policy clarity would be incredibly useful and I think it’s good for Evans to be out there talking about it. Presidents Fisher, Kocherlakota, and Hoenig haven’t been shy about discussing their views in public and it’s time for people who aren’t happy with prolonged sky-high unemployment to do the same.