The Federal Reserve should explore how low unemployment can go without provoking unwanted inflation and not put too much weight on estimates of the minimum, or “natural,” jobless level the U.S. economy can sustain, Chicago Fed President Charles Evans said.
“Wage growth has remained quite moderate, even though we’ve been below conventional estimates of the natural rate for some time. This suggests that, at a minimum, unemployment is not so far below its natural rate that overly high inflation is an urgent threat,” Evans said Thursday in opening remarks at a “Fed Listens” event in Chicago.
“This leads me to think that the Fed should continue to cautiously probe for the true level of maximum employment. That is, we shouldn’t treat a statistical estimate of the natural rate as a hard barrier that automatically signals an impending problem,” Evans said. “Of course, we should also be mindful of the possibility that unwelcome inflationary imbalances could yet emerge. We need to keep both possibilities in mind.”
Thursday’s event at the Chicago Fed is the last of a series of sessions organized by the U.S. central bank this year to gather input from communities across the country on how it makes policy.
The Chicago Fed chief’s remarks highlight the tension between the so-called natural-rate framework for thinking about monetary policy -- which arose from academia beginning in the 1960s and has been a key plank of U.S. economic policy making ever since -- and the lived experience of working Americans. It stipulates that allowing the unemployment rate to fall below a certain level risks an inflationary spiral, and Fed officials as recently as last year were using it to justify a campaign of interest-rate increases.
“As part of our probing for the level of maximum employment, our panelists can provide us with very useful evidence from the frontlines,” Evans said, referring to the community leaders who were invited to speak at the event. “Such insights may have important implications for our choice of monetary policy strategy.”
Fed Governor Michelle Bowman also provided opening remarks to the conference, urging participants to offer their views on how the central bank should address the persistent shortfall of inflation below its 2 per cent target.
“It would be helpful to hear whether you think the Federal Open Market Committee should consider strategies that aim to have inflation exceed our target for a period of time to make up for the earlier shortfall, or whether you think that would threaten the decades of success the Fed has had keeping the public’s inflation expectations low and stable,” she said in her prepared text.