Yesterday, Minneapolis Fed President Narayana Kocherlakota argued in FedSpeak, that there likely is no reason for further monetary accommodation at the next FOMC meeting. Today, Chicago Fed President disagrees with the view that inflation risks are too high from additional easing and, indeed, calls for further accommodation to help bring down unemployment.
"The Federal Reserve has responded aggressively to the deep recession and weak recovery, cutting short-term interest rates to essentially zero and purchasing assets that expanded its balance sheet by a factor of three. But since undertaking the so-called QE2 round of asset purchases last fall, the Fed's aggressive policy actions have been on hold."
"Some believe that this pause is entirely appropriate. They claim that the economy faces some kind of impediment that limits how much more monetary policy can do to stimulate growth. And, on the price front, they note that the disinflationary pressures of 2009 and 2010 have given way to inflation rates closer to what I and the majority of Fed policymakers see as the Fed's objective of 2%. These considerations lead many to say that when adding up the costs and benefits of further accommodation, the risk of over-shooting our inflation objective through further policy accommodation exceeds the potential benefits of speeding the improvement in labor markets."
"I would argue that this view is extremely, and inappropriately, asymmetric in its weighting of the Fed's dual objectives to support maximum employment and price stability."
In plain English, Evans is saying that the faction within the Fed that is worried about inflation has given the risk of a boost in inflation too much weight relative to the problem of unemployment being too high.
Evans specifically calls for additional action by the Fed.
"However, given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation. Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2%."
"But I do not think that a temporary period of inflation above 2% is something to regard with horror. I do not see our 2% goal as a cap on inflation. Rather, it is a goal for the average rate of inflation over some period of time. To average 2%, inflation could be above 2% in some periods and below 2% in others. If a 2% goal was meant to be a cap on inflation, then policy would result in inflation averaging below 2% over time. I do not think this would be a good implementation of a 2% goal."
The debate within the Fed continues at the next FOMC meeting on September 20-21.