Fed Leaders Debate Monetary Policy

Written by Evan Gao ’16

feddcFederal Reserve officials do not often publicly debate how the Fed should run the economy, but this past Tuesday on April 2nd, Charles L. Evans, president of the Chicago member bank and Jeffrey Lacker, president of the Richmond member bank, squared off in a debate on the Fed’s current monetary policies.

The two Fed leaders sharply disagreed with each other in all aspects. Lacker, a seemingly avid conservative, doubts the excessive use of monetary policy (targeting inflation, setting interest rates, indirectly affecting exchange rates, etc.) to increase growth. Evans, however,represents the majority view and believes that policy accommodation and usage should continue until unemployment falls below 6.5%, or inflation rises above the 2.5% goal. Evans’ strategy stems from an “ends justify the means” standpoint. If the Fed is stimulating the economy and creating jobs as a result, then the policies it enacts are more than acceptable and should be continued until the Fed’s economic goals are reached. Thus, he is willing to allow inflation to rise a little past the target level if it creates economic stimulus. Lacker, in contrast, is wary of the risks of long-term high inflation, arguing that monetary policy only has a limited effect on job growth. He evoked the Great Inflation of the 1970s when the Fed’s easy money policies designed to combat unemployment led to a recession and considerable stagflation. Similarly, Evans countered with some historical evidence of his own, stating simply that times are different. Inflation back in the 1970s was largely driven by the state of the labor market and policy surrounding wages. Higher wages led to increased consumer demand, which led to an increase in prices, which, in turn, decreased spending power. In the present, on the other hand, wage pressure is not an issue in the labor market, and would not be a contributor to inflation.

Evans and Lacker’s debate on how to best run the economy could go on forever. They represent two extreme sides; a “do-nothing” attitude versus a “do-everything” mentality; a conservative view versus a liberal view. Both men gave many convincing points, and one cannot help but lie somewhere in the middle. However, the person that can rarely be a centrist is Ben Bernanke, head of the Federal Reserve. He seems to side more with Evans on this debate, arguing that the risk of doing too little outweighs the risks of doing too much. Where do you stand?

Sources:

http://www.nytimes.com/2013/04/03/business/a-debate-in-the-open-on-the-fed.html?ref=economy

https://mninews.marketnews.com/index.php/feds-lacker-evans-square-debate-over-mon-pol-risks?q=content/feds-lacker-evans-square-debate-over-mon-pol-risks

http://www.washingtonpost.com/local/federal-statistics-show-dc-unemployment-rate-unchanged-from-january-to-february/2013/03/29/8de26dc6-989d-11e2-b5b4-b63027b499de_story.html

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