Charles Evans
Low Inflation and the Symmetry of the 2 Percent Target
14.11.2017
You can download fuel speech direct from
this link.
You
know that President Yellen explains why inflation is not at %2 target with idiosyncratic
transitory variables. Evans does not agree with Yellen.
I
am concerned that persistent factors
are holding down inflation, rather than
idiosyncratic transitory ones.
Namely, the public’s inflation
expectations appear to me to have drifted down below the Federal Open
Market Committee’s (FOMC) %2 symmetric
inflation target.
Evans
thinks that persistent factors, inflation expectations, affect
inflation target.
Evans
highlights that the transitory factors
(such as energy price pass-through or a higher dollar ) do not affect inflation now.
Why
inflation expectations are more important ?
Over
the past several years, numerous measures of longer-run inflation expectations
have moved down noticeably. Of course, inflation expectations serve as an
important benchmark for the wage demands of workers and the pricing decisions
of businesses, and thus are key determinants of actual inflation itself.
Why
this target is important ?
I
believe this issue is especially important now because there is a big strategic
risk in failing to get core PCE
inflation symmetrically around %2 before this economic cycle ends.
At
some point in the future, some unexpected
economic shock will generate a downturn in activity. When it comes,
monetary policy will likely need to provide substantial accommodation to
address rising unemployment and below-target inflation.
For
example, the FOMC’s consensus view for the long-run equilibrium federal funds
rate is 2.50-2.75 percent. This means that we
don’t have as much room as we have in the past to lower rates in response
to a negative shock. In such an environment, a return to the zero lower bound (ZLB) on rates is much more likely.
Dr. Engin YILMAZ
Ankara
16.11.2017
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