Regional President Speech

A Case for Monetary Policy Accommodation Virginia Commonwealth University School of Business Foundation 2013 Investors Circle Dinner Richmond, VA April 2, 2013 Charles L. Evans President and CEO Federal Reserve Bank of Chicago 1 Long-Run Strategy for Monetary Policy (January 2012)  π* = 2% PCE inflation  U * ~ 5.25% - 6% time-varying t SEP long-run central tendency  Balanced approach to reducing deviations of inflation and employment from long-run objectives Current and Expected Policy Losses Loss Function L = (π - π*)2 + 0.25 (y – y*)2 (percent) L = (π - 2)2 + (u – un)2 π=5.5% 2014 FOMC Forecast (March 20, 2013) u=9% Current Value September 2011 value Subdued Actual and Expected Inflation Total PCE Price Index Expected Future Three-Year Ahead (level) Inflation (percent) Dec. 2007 140 2.50 130 2.25 2% Price-Line from Expected Inflation for 2023 December 2007 (as of 2020) 120 2.00 Total PCE Path Implied by Current FOMC Inflation Forecasts 110 1.75 100 1.50 Expected Inflation for 2016 (as of 2013) 90 1.25 2007 2009 2011 2013 2015 2017 2013 2014 2015 2016 2017 2018 2019 2020 Expectation As Of Source: Inflation forecasts are from the March 20, Source: FRB-Chicago Staff Calculations 2013 FOMC Summary of Economic Projections Recent Policy Actions  Open-ended Treasury and MBS purchases – $85 billion per month – Until there is substantial improvement in labor markets  Low fed funds rate at least until: – Unemployment < 6.5% or – Inflation forecast > 2.5%  Highly accommodative policy even after the recovery strengthens Alternative Policy Prescriptions Federal Funds Rate (percent) 6 Taylor Rules: R = 2.0 + π + 0.5(π – 2) + α gap 5 t t t t Taylor 1999: α = 1.0 Taylor 1993: α = 0.5 4 Optimal Control Optimal Control: Taylor 1999 Min (π – 2)2 + (u - un )2 + ΔR2 t t t Taylor 1993 3 2 1 0 2011 2012 2013 2014 2015 2016 2017 2018 Source: Janet L. Yellen, “Perspectives on Monetary Policy,” Boston, June 6, 2012 Progress toward the Dual Mandate Goals with Alternative Policies Unemployment Rate PCE Inflation (percent) (4-quarter percent change) 10.0 3.5 9.0 3.0 Optimal Control Taylor 1999 Taylor 1993 FOMC Threshold Peak: 2.3% 8.0 2.5 7.0 2.0 FOMC Threshold 2017Q1 2015Q1 2016Q1 6.0 1.5 Optimal Control Taylor 1999 Taylor 1993 5.0 1.0 4.0 0.5 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018 Source: Janet L. Yellen, “Perspectives on Monetary Policy,” Boston, June 6, 2012

Charles L. Evans (2013, April 1). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20130402_charles_l_evans

@misc{wtfs_regional_speeche_20130402_charles_l_evans,
  author = {Charles L. Evans},
  title = {Regional President Speech},
  year = {2013},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20130402_charles_l_evans},
  note = {Retrieved via When the Fed Speaks corpus}
}