Chicago Fed President to his colleagues: Obey the law

Posted on: November 15th, 2011 by Nicolas Mendoza 1 Comment

The Federal Reserve Bank of Chicago has unveiled a new webpage that explains the Federal Reserve System’s dual mandate of achieving maximum employment while keeping prices stable, and shows key indicators of whether the Fed is actually fulfilling that mandate.

Charles Evans, president of the Chicago Fed, shared the new page on Facebook this morning with the comment: “I’ve spoken a number of times this year on the Fed’s Dual Mandate — a congressional requirement to promote both maximum employment and price stability. We’ve just launched a Dual Mandate site with background information and links to my speeches on the topic.”

The page features graphs of the unemployment rate and changes in consumer inflation since 1999, together with the current projection from the FOMC, the Fed’s policy committee, of what the unemployment rate and inflation rate will be in the next five years. The Fed’s most recent projections, from the start of November, say that the unemployment rate will remain above 7.5 percent through 2013, and the inflation rate will remain below 2 percent during that same time period.

That’s an unacceptably high level of unemployment for Evans, who has said that it’s worth tolerating a higher rate of inflation, up to 3 percent, in order to accelerate a return to full employment.

Evans has been the loudest voice on the FOMC in favor of using monetary policy to stimulate the economy further. In the FOMC’s most recent policy statement, which announced that it would continue to maintain its current level of monetary stimulus, Evans was the lone dissenting vote. He voted against the majority because he favored “additional policy accommodation.”

In a conversation with reporters at the Council on Foreign Relations today, Evans reaffirmed that he is calling for “increasing amounts of policy accommodation” in order to reduce the unemployment rate, which is currently 9 percent. “We ought to be behaving as if there’s a very big problem out there.”

Evans’s vote was the first dissent for further stimulus since December 2007. Since then, all dissenting votes have come from inflation hawks who have opposed the FOMC’s efforts to further stimulate the economy in the wake of the recession. That the vote for further stimulus comes from Evans is particularly noteworthy because all of the dissenting votes against stimulus in the past three years have come from his fellow Federal Reserve Bank presidents on the FOMC.

Seven seats on the FOMC are appointed by the president and confirmed by Congress, but five seats are reserved for presidents of the regional Federal Reserve Banks. As the American Independent has previously reported, these presidents aren’t selected by democratic representatives but rather by the Federal Reserve Banks’ boards of directors, which are predominantly made up of senior business and financial executives.

Some of Evans’s fellow Federal Reserve Bank presidents have made statements indicating they don’t believe that unemployment should be reduced by government at all. In a speech on the same day as the most recent Fed statement, Dallas Federal Reserve Bank president Richard Fisher criticized government efforts at reducing unemployment. ”Pliant fiscal authorities,” Fisher said, “have run out of enabling money.”

Fisher added that were the Federal Reserve to support Congress’ spending by “monetizing their debts”, it would end “in the most ruinous of scenarios, the onset of hyperinflation.” The government must not, Fisher said, “hide under the skirts of the Federal Reserve.”

This is not only a rejection of Evans’ belief that the Federal Reserve should directly undertake more stimulus, it is also a rejection of Federal Reserve Chair Ben Bernanke’s statements at his most recent official press conference that Congress should engage in short-term fiscal stimulus in order to reduce unemployment.

But as the Chicago Fed’s new dual mandate page explains, the Federal Reserve does have a legal obligation to reach maximum employment. The Chicago Fed page quotes exactly where in the Federal Reserve Act the mandate is written:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregrates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. [emphasis added]

The most recent FOMC statement is at odds with this mandate, as it currently states in its own projections that unemployment remains unacceptably high, but is simultaneously committed to maintaining policy constant. Moreover, under current policy, inflation is projected to remain under 2 percent, below what it has been in past decades, and talk of “hyperinflation”, or extremely rapid or out of control inflation, is considered by most economists to be a red herring in the debate over whether to stimulate the present day American economy.

Here are the Chicago Federal Reserve’s charts showing unemployment and inflation over the next five years:

 

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