For years, the Fed’s been waiting for unemployment to get under 6.5%, so that it can stop offering money for free. This has taken somewhat longer than the central bank likely expected when the threshold was set, and now, the man who came up with the idea wants to make sure it doesn’t make the same mistake again.
The “cut rates when unemployment drops below 6.5% if inflation hasn’t gotten over 2.5%” policy is apparently called the “Evans rule” for Chicago Fed President Charles Evans. And while Paul Volcker plans to use his remaining days defending the regulation that bears his name, Evans isn’t eager to see a sequel.
Federal Reserve Bank of Chicago President Charles Evans said Monday “there’s not a large expectation” the current system of numerical thresholds will remain in place for much longer. The Fed is likely to replace it with more “qualitative” guidance, he said in a speech at Columbus State University, in Georgia….
“Once we get to 6 ½%, pretty soon we are going to have to come up with a different language formulation that doesn’t mention 6 ½%,” Mr. Evans told reporters. “That’s why I say I expect it will be a qualitative description. It ought to be something that captures well the fact” that short-term rates, now near zero percent, will “continue to be low well past the time we change the language….”
Mr. Evans also said that if it were up to him, the Fed would refrain from raising short-term rates until sometime in 2016. Most Fed officials believe the first rate increase will come in 2015 if economic conditions improve as they expect.
He also said he remains “optimistic” the U.S. economy will grow between 2.5% and 3% this year, amid gains in hiring and a slow increase in inflation. He expects the jobless rate to fall below 6.5% this year and sees inflation rising to 1.5% this year on its way back to the Fed’s 2% target. He sees little risk inflation will surge at any point in the future.
Fed’s Evans: Time to Revise Forward Guidance [WSJ Real Time Economics blog]