One of the Best Fed Speeches You’ll Ever Read

September 24th, 2014 at 1:58 pm

By Chicago Fed President Charles Evans–I’ll have more to say about this later, but for now, your homework is to read this carefully.

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9 comments in reply to "One of the Best Fed Speeches You’ll Ever Read"

  1. Peter K. says:

    I watched it livestream. Thank you Internet! Good question by you Mr. Bernstein. I agree his speech was very heartening. Hopefully Chair Yellen is listening to him.

  2. Larry Signor says:

    I think I have read most of Mr. Evans views, but cannot seem to remember where…OTE? BTP? PK? Prof. Thoma?…ah, somewhere. I like “whites of their eyes” inflation fighters. I am taking a likin’ to Ms. Yellen’s Fed.

  3. george kaplan says:

    There is a fixation on 2% inflation as if it is a magic number. In the 1950’s some economists thought that 3% was better for the economy. Is there any theoretical or practical basis for 2% ?

    • Larry Signor says:

      It’s a 1% thing, George.

    • Tom in MN says:

      That is my question too. I think practice has shown 2% is too low, We have not been to full employment for a long time.

      Evans talks about murky inflation expectations, and indicates that they are flat. But long term bond rates have been declining for a long time. And long term rates set the standard by which short term rates are measured. When the FOMC raises their rate to near the long term rate, the economy contracts. As the long term rate falls, this leaves the FOMC with less and less room to maneuver above the ZLB. I think it is the 2% inflation target being too low that is cause long term rates to fall and boxing us in at the ZLB.

      • smith says:

        The trouble with normal or moderate levels of inflation which no one seems to address is the control over prices. Whatever the cause, whether labor seeks increased wages, or input to production (raw or value added) costs more, the natural reaction of business is to increase prices, not giving up any profits. The larger the business, the more this is a necessity to meet quarterly expectations, not only for maintaining profits but for increasing profits and growth. Large businesses also have more control over their prices, some obviously related to market domination. Galbraith suggested nearly 50 years ago (see Affluent Society) the only solution to combat inflation during full employment, would be permanent price controls. In the 1980s, breaking labor, globalization, outsourcing, just heading south, became important paradigms to deal with costs. The last few decades also saw the advent of multiple labor tiers where vestiges of unionization still exist, new employees earn less. New to the battle (for post war America) is the “surplus army of labor” where 6% unemployment is the new normal, plus 2 to 4% underemployed or withdrawn from labor force.
        Commodity shocks also have the capability to disproportionately affect prices that are not subject to competitive pressure and are more or less set arbitrarily. Surprisingly (or not), this is more the case in a services oriented economy too. In a well functioning economy, rising costs anywhere are shared by labor and business and the particular sector affected. Instead, any increase anywhere is magnified and propagated everywhere. If labor power was restored, business would bring down the economy, losing a battle, but winning the war, by raising prices. The reality is we have price controls, the control in the hands of business (check your cable bill). I’d prefer competition over bureaucratic regulation as a solution.

        • smith says:

          When labor effectively strikes against outsourcing, globalization, and multiple tier labor markets, the leading newspapers give biased accounts that support business. To wit:

          “The tone from the French government, which owns 16 percent of the airline, hardened in recent days as the strike dragged on, clouding the image of the country as a competitive place to do business and causing chaos in travel schedules.”

          a) There is nothing to cloud, it’s competitive, but you have to contend with onerous requirements that impede employment (no at-will employment).
          b) The tone of this reporting says taking the side of labor trying to keep wage rates from falling and job opportunities in the country is a bad thing.

          No, it’s not the Wall Street Journal, it’s the New York Times.
          Air France-KLM Gives In to Striking Pilots’ Union, Scaling Back Transavia Plan
          By DAVID JOLLYSEPT. 25, 2014

          Then to further confuse matters, the quote from the government seems anything but pro labor and anti business:

          “This strike must end now,” Stéphane Le Foll, a spokesman for the French government, told Radio Classique. “We’re stuck here on a project that, strategically, is important for the company. We have to find the ways and means for Air France to extend its activity in low-cost flights.”

          Fight for full employment and higher inflation, but there is a built in bias in the media you must fight too, anti labor and siding with business who also are aligned in keeping inflation down (lest wages creep up)

  4. Robert Salzberg says:

    In the next to last paragraph:

    “The last thing we want to do is regress back into the ZLB. Indeed, such a relapse would be a sign there was something else going on that was preventing the economy from being as vibrant as we thought possible.”

    Sustainable economic growth in developed countries is based upon an educated populace, good infrastructure, and a well functioning government that regulates properly. (Setting aside the predictable ‘black swans’ of global climate change, war/terrorism, catastrophic asteroids, and disease epidemics.) Until we have a change in Congress, our economy will not be anywhere near “as vibrant as we thought possible.”

    Dave Johnson details a comprehensive look at how Republican obstruction is destroying our economy here:

  5. Richard Patten says:

    Elephant in the room: Fed Rsv as the mechanism for influencing well-being of national economy is much too weak. We must engage means other than feeding the fed banks.