Dr Charles Evans, President and CEO of the Federal Reserve Bank of Chicago, visited Hong Kong in late March. The bank is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., form the country’s central banking system. Dr Evans set aside time in the midst of his busy schedule to meet students at the Business School and to share his thoughts on the economy and US monetary policy.
Dr Evans began his remarks by reviewing some seminal events in the central bank’s history. Specifically, he cited three experiences that together influence his current thinking on US monetary policy. These include the Great Depression that occurred between 1929 and 1938, the Great Inflation between 1965 and 1980, and the Treasury Accord of 1951.
He said that it is important to be reminded of the lessons monetary policymakers learned from these episodes. He explained, “You have to do enough to make sure the economy will not be held back. And, on the other hand, you have to recognize when you cannot do more. That’s the challenge of a central bank.”
Bull’s-Eye Target
Dr Evans explained that the Fed has a dual mandate to maintain stable prices and maximum employment. Using a circular “bull’s eye” chart, he illustrated how the Fed is working towards achieving its targets in the next few years. These objectives are taken to be 2 percent Personal Consumption Expenditures (PCE) inflation over the medium term and a long-run unemployment rate goal in the range of 5.2 percent to 5.6 percent. The chart depicts the losses that result from taking a balanced approach to evaluating under- or overshooting the Fed’s twin goals. Policy losses that entail equal weighting on policy misses for these two objectives are depicted by concentric circles around the goal. The larger the losses are, the greater the diameter of the circle depicting those losses.
Many obstacles impede progress towards achieving its dual mandate. Dr Evans noted the challenges posed by global economic headwinds and the inability to reduce nominal interest rates further to spur economic growth. He pointed out that, in the current environment, the Fed has had to use unconventional means, such as large scale asset purchases, commonly known as quantitative easing, to add additional monetary accommodation.
From the US to the world
During the Q&A session, Dr Evans gave his views on some wider global questions, including the impact of imposing sanctions on Russia in response to its perceived aggression in the Ukraine, the effect of demographic factors on labor force and employment statistics, and the value of the stock market.
When asked to comment on prospects for the US dollar, Dr. Evans presented another easy to understand visual aid. He showed the audience a Zimbabwean banknote of a hundred trillion Zimbabwean dollars that today only has a value of around USD20. The simple prop highlighted the importance of low and stable inflation in maintaining the relative value of a currency.