Chicago Federal Reserve president Charles Evans doesn't look the part of a heretic. But in the cozy, conservative club that is central banking, he certainly qualifies. While most of his colleagues at the Fed have recently taken an even more hawkish turn, Evans remains a champion of additional monetary stimulus. And on Tuesday he took an even bigger step: He became the first sitting Fed member toendorse nominal GDP (NGDP) level targeting.
Sounds wonky? It is. But here's why Evans' suggestion is also extremely bold. The Fed famously has a dual mandate: It's supposed to promote the maximum level of employment consistent with its two-percent inflation target. In reality, this dual mandate often looks more like a single inflation mandate. NGDP level targeting would do away with this problem by rolling the mandates together. And right now, that would mean a much more aggressive Federal Reserve.
The debate over NGDP level targeting and inflation targeting is part of a larger war that's been going on the past few years in the normally staid world of central banking. It's a three-sided debate over what the Fed should do now. There are those who think the Fed's dual mandate goes too far in promoting full employment, those who think it's just about right, and those who think it doesn't go far enough.
In the end, this is really a clash over inflation. After all, we're talking about central bankers here. The first group is worried that by effectively printing more money to goose the economy (better known to in policy circles as "quantitative easing"), the Fed has already created future inflation. The second group isn't worried about the money that's already been printed, but believes that running the presses any further will create future inflation. Finally, a third group is worried that if the Fed doesn't print more money, there won't be enough inflation to keep the economy healthy. Evans belongs to the last camp.
Actually, it's not quite true that Evans wants more inflation. He wants more income. To revert to econospeak, he wants the total size of the economy -- that is, inflation plus growth, or nominal GDP -- to get back to the long-term trend it was on before the financial crisis and recession. He would prefer if NGDP goes up due to real growth. But if it's a choice between stagnating NGDP and NGDP that's going up mostly because of inflation, Evans would choose the latter.Read the rest at The Atlantic
A Rebellion at the Federal Reserve?
by Matthew O'Brien | associate editor at The Atlantic covering business and economics.
(h/t Mark Thoma)