Charles Evans was the president of the Federal Reserve Bank of Chicago from 2007 to 2023, a 16-year period that was certainly not for the central bank faint of heart. His years at the Chicago Fed helm started with that GFC - Great Financial Crisis - and subsequent Great Recession and ended with the Pandemic years when inflation soared and interest rates had to be boosted at their fastest rate since at least the 1980s.
So as the September Fed policy meeting draws ever closer, as the Fed’s policy framework changes are being digested, and as the Trump administration still pushes the Fed to cut rates and is seen trying to pack the Board of Governor’s with candidates that will carry out the President’s command to cut rates sharply ASAP, what does Charlie see Chair Powell leading the Fed to do now?
He acknowledges that “it’s not obvious from the data that the Fed needs to cut rates…After all, inflation continues to be above its 2% target…” And” there is no single data report that has indicated, whoa, the Fed is wrong-footed and needs to make an adjustment… but it is consistent with the economy growing more slowly…it’s not like a turning point period…But it is consistent with the economy growing more slowly.”
”So they are balancing a number of different risks with higher than…desirable inflation but a little bit of weakness,” Charlie adds. “So there is scope to reduce the level of restrictiveness and still…to be in a position to bring inflation down.”
Dive in and also hear why he says that he does not see that changes made in the Fed’s policy framework review “are going to have a material impact on the future trajectory of policy, either before they made the changes or knowing the changes they have made.” In the end, “the framework is fine…This reminds you… it doesn’t even matter what you write down, it’s what policymakers DO.”
And find out why contrary to those who are making bets on who Trump will ultimately pick to replace Powell, Charlie thinks the President’s smartest step would be to reappoint Powell instead.
Powell’s description of risks gives the Fed options 00:00:56.130
There is a lot going on, and there's really quite a lot at stake, too. Well, I thought, I thought Powell's speech was a good one for the situation. I thought he certainly positioned himself and the Fed so that if they would like to make a rate cut, they are well-positioned. He mentioned that the risks are a little bit different than they saw them at the previous meeting, and there's a little more concern about job market weakness. The economy is still…you know, pretty resilient, and that's, that's part of the challenge. You know, the consumer still, seems to be doing well. And the unemployment rate itself is really quite low. There is the situation in the labor market where, firms have been reluctant to take on new workers, but they're not really getting rid of workers either, so it's described as a little more fragile. It's also the case that inflation remains above the 2% inflation objective, and the tariffs are, you know, leading to a boost in the CPI and the PCE, the question of whether or not it's really transitory. Or it works its way into inflation expectations, or more broadly into services inflation is, you know, still alive. So, you know, in that situation, I think, Powell… positions the Fed to maybe move down from what is arguably a restrictive setting of the funds rate at 4.3% most recently, and they would still be, restrictive after one cut. That's not a bad place to be and still maintain optionality, but we'll have to see.
Right now more anticipation of weakness than weakness 00:04:04.310
Charles Evans: you know, it is the case that no single data report has indicated, whoa, the Fed is wrong-footed and needs to make an adjustment, you know? It's not like we have not seen a data report that, suggests that there's a turning point. But it is consistent with the economy growing more slowly. That is what the FOMC has been projecting. That's what private forecasters have been projecting. When people have been saying, we're looking for about 1% to 1.5% growth, that's below trend, that's… that's slower. And the most recent employment report you know, it was weaker. The previous two months being revised substantially is, really quite noteworthy, but, it's still in the realm of , the economy's doing okay. It's resilient. Unemployment's 4.2%. So. I mean, I think they've set themselves up, you know, for something, but the way you ask the question, it's sort of like, well, does the Fed need to cut rates?
Not obvious that a rate cut is needed 00:05:10.010
It's not obvious from the data that the Fed needs to cut rates. After all, inflation continues to be above… above its 2% objective, and, you know, how… what is the communication from the Fed about their strong commitment to 2%, and what…This year and next year's inflation rate mean for people who might begin to become skeptical? About that. So, they're balancing a number of different risks with higher than, you know, desirable inflation, but a little bit of weakness. So, there is scope to reduce the level of restrictiveness and still, you know, be in a position to be working to bring inflation down.
If risks are balanced policy should be at neutral-where is that? 00:06:40.560
You, you can argue for rate cuts…the way that Powell mentioned not very long ago, which is, you know, if you see risks more balanced towards our maximum employment and price stability, you know, objectives, it would make sense to be closer to neutral than we currently are. So if, you know, Fed funds rate of 4.3 is restrictive, then they would have some scope to cut rates to a more neutral… to a neutral setting. Okay, well, that gets you to what is neutral? And, you know, a lot of people don't like to talk about that at all, but it doesn't change the fact that you must make a judgment. Is policy accommodative or restrictive? And so you want to move to one where it's neither accommodative or restrictive. How many rate cuts can they do at 25 basis points? I don't know. This is a judgment.
Tariffs are an issue here/ Waller’s list …00:07:30.930
call. I think that Governor Waller has made some very, careful, and useful comments about inflation and the tariffs, about the size of the tariffs, about the duration of their effect on inflation. I enjoyed, in particular, his commentary about, if you want to compare this to the pandemic, high inflation period, we had a number of things going on with supply chains and very strong fiscal support, and how are we doing on that? Well, we don't have the same, you know, kind of inflation pressures that we saw during that time period, so there's really sort of a Waller checklist for comparing inflation pressures against the pandemic. And at the moment, you know, I think he's on strong ground for kind of saying, it does look like this could be one-off. Now, we don't know how part of the surprise during the pandemic is that it just was unrelenting. The shocks kept coming, something new came, Russia invaded Ukraine, that was not <expected>. I know I was there, receiving some information about auto suppliers ought to be receiving, chips before too long, and it just didn't happen.
Job market remains an enigma/ but inflation is simply NOT at 2% 00:08:51.060
With any useful time frame. So, I think that on the inflation side, Waller has made some helpful comments, and other commentators have said that, too. I think on the employment side, it's much more uncertain. We've had some reports, we've had revisions, you can talk about the quarterly a report that the BLS will be putting out, which likely will show reduced levels of employment. It's not easy to translate into how that will change the monthly changes, which are going to be most important for assessing turning point kind of risks, and that type of thing. And so. If you're comfortable with the inflation implications, and this is why I come back to the 2% inflation objective, I don't think the Fed…the Fed just sort of says, we have a 2% inflation objective. Powell has often said, we've been well served by that, inflation expectations are anchored. But inflation has been above 2% now for quite some time, and it was January of 2024 when the Fed said, we need confidence that we're on the path to 2%. You know, and now we're, you know, September of 25.
What does this long time away from 2% mean – plus tariff risk? 00:10:05.190
Charles Evans: checking in, communicating more about how long are you willing to deviate and accept this, especially with, you know, the tariff influences and their one-offs. More commentary about that would be, helpful clarification for assessing what they are likely to do.
The new framework does not seem tobe a game-changer 00:11:17.670
I don't think they made any changes that, are going to have a material impact on the future trajectory of policy, either before they made the changes or now knowing the changes that they made. And I say that in part because any… so if you think about the things that they took out of the statement from the 2020 framework, they took out the flexible average inflation targeting. They don't talk about averaging 2% at all. They took out the part about emphasizing employment shortfalls, and they just talk about maximum employment and how that's very important. They took out the elements… they don't talk about the effective lower bound to the extent that they did. They acknowledged that you know, if policy finds itself at the effective lower bound, then the Fed will use all available policy tools. But it doesn't emphasize the fact that interest rates have come down, and there's a greater risk of the effective lower bound. Now there seems to be more of a presumption That the neutral rate is higher, that the effective lower bound isn't going to be hit with the same likelihood.
A new business cycle orientation for policy? 00:12:31.630
Then, presumably, if we were to have a recession in the next couple of years, they must be expecting they won't have to go to the effective lower bound, or perhaps they would be less willing. to drop the funds rate as low. That's another strategic question that I don't think has really been answered by taking, you know, that out. It could be that they just would go, well, we don't really need to do as much, and we'll let it play out over time. I don't think that question has been answered so much here, but Even… even with those changes, All of the state contingent issues that were in the 2020 framework are not…they're not germane.
The risks have shifted they are not at the zero bound anymore 00:13:06.610
Today, you don't have to worry about averaging 2% inflation after a period of underrunning, because they have not been underrunning, and there's no expectation that they will underrun for a few years… for quite a long time, right? So that whole state contingent, they were uncomfortable by having that language in the strategic framework, so they took it out. In the current environment, they don't expect, I wouldn't either expect either, that you would have needed reference to that over the next 5 years, or even longer. Higher inflation is much more likely, it seems to be.
Fed is in a good place to achieve its dual mandate- 00:13:37.880
Charles Evans: And then the shortfalls, taking that out, that… and they mentioned what they really need to do is focus on inflation, and I think that that was sort of evident when they emphasized shortfalls. It's like, oh, you know, once the unemployment rate is low and consistent with maximum employment, pay attention to inflation. And if inflation's a problem, deal with it. you know, we did that when it was necessary, and they'll do that in the future. So I think going forward, the framework sets them up fine. It's really completely consistent with a central bank that says, I've got a dual mandate to pursue maximum employment, price stability, I will use monetary policy to achieve that.
Price stability is 2% 00:14:13.51
Price stability is 2%. We will get… we will achieve 2%. They don't talk about averaging it, but presumably, they're going to have to get to 2%, or inflation expectations might move in line with higher inflation.
Old framework was not bad; it had become irrelevant 00:15:17.950
Well, I argued earlier that the 2020 framework was perfectly fine. It would be… it would have been fine to continue with that framework because it had state contingent elements. When those state contingent elements aren't apt, you don't have to worry about them, right? So, the miscue, for sure, from the Fed was the September 2020 forward guidance that emphasized sort of a three-pronged test for, when the funds rate would be raised. And the one that ended up being the most, difficult was the fact that we weren't quite at the lowest unemployment that we thought was consistent with maximum employment until later. Inflation surely had risen to the point where you could have said, done, check, and they could have started raising rates. That, combined with… and again, this is more tactical, it has to do with how you implement asset purchases and how you unwind them.
It's what policymakers do that matters- 00:16:12.480
I think Powell has done a good job in doing it, but the Fed continued to buy assets later than they would choose to do now. I mean, basically, that's one that they would definitely go back and say they should have started…Stop purchasing them earlier And then they could have started the funds rate increase. But at any rate, I mean, I think that the framework is fine. What this reminds you is, it doesn't matter… it doesn't even matter what you write down, it's what policymakers do. Yeah. Right, and we're finding that throughout the United States and the government right now, right? It's, what do people do? You can have things written down, but it's, you know, what are people actually going to do.
It comes down to leadership… 00:16:50.470
And you can have a strategy that says, oh, you know, you should strive to increase inflation above 2% when it's been lower, and it's kind of like… hey could easily go, yeah, I don't think that's the situation that we're in, we're going to get back up to it and not do it. So, you can put it in and do, you know, do policymakers do it or not? So, at the end of it, it comes down to leadership, it comes down to trust in the leadership.
The policy spotlight is shifting to inflation 00:17:13.450
And I think that the… the thing that everybody will be pointing to, focusing on, is inflation. 2%, is that… are you… are you consistent with your goal? And, you know. you could have accommodated policy with higher inflation than your objective if the economy's in a recession, and you're fighting with the dual mandate. But if the economy's doing well, and inflation's high, and you don't work against that, then people are going go, oh, I guess you don't really mean 2%. That's where I think the focus will be for leadership over the next few years.
An attack on the Fed 00:19:22.290
In asking Governor Cook, to resign or… and firing her, that's a very aggressive move against charges which are not well understood, or… I mean, they've been articulated, I suppose, but there hasn't been, any allowance to give her time to talk about it, or, you know, how it's been written down, and it just sort of, you know, appeared out of nowhere you know, the allegations, so it's sort of… it seems like an attack on the Fed.
Partisan appointees, yes, but a nonpartisan Fed 00:20:00.290
I came to the Fed in 1991, I've been paying attention to the composition of governors as they've been appointed by Republicans and Democrats, and, you know, they have all gone and done their job in a nonpartisan fashion, and they've been focused on what's best for the economy in order to deliver On our dual mandate. objectives for the Fed, and so I think that no matter what the composition of the Fed board is going to be, if you're not taking actions. to deliver maximum employment and price stability, that is going to be a problem for Americans, for consumers, households, businesses, and markets aren't really going to understand that. And so, you know, you either have a commitment to 2% and you deliver it, or it's a very different monetary policy, and in other countries where they've sort of done that, there's a lot of volatility. So, I mean, I continue to think that really, the genius appointment would be to reappoint Jay Powell.
The slippery slope of inflation targeting 00:24:22.530
Charles Evans: And, you know, potentially more volatility. I think, ultimately, you're looking for the Federal Reserve to deliver on its 2% mandate and maximum employment, and if they're not able to do that, and they could, they could, because 4.3 is restrictive. It could be that you reduce the funds rate, it's neutral. You get the economy going. You get a little more structural, growth. Although I think that's hard with the labor policies that are being implemented now, but, you know, it's possible that you could get that, and you wouldn't necessarily get inflation, you know, to continue rising. I'm not quite sure if that brings inflation down to 2%, so a question is going to become. If they're having trouble getting down to 2%, are they all of a sudden going start saying, well, 2.5% is fine?
TRUST 00:25:11.180
I think it's going to end up, you know, markets are going to be thinking about, trust, and if they can see what the policies are going to be, and if that's consistent with a well-functioning economy. We'll see.
Charles L. Evans
Charles L. Evans was the ninth president and chief executive officer of the Federal Reserve Bank of Chicago from September 1, 2007 to January 8, 2023.
Before becoming president in September 2007, Evans served as director of research and senior vice president, supervising the Chicago Fed's research on monetary policy, banking, financial markets and regional economic conditions. Prior to that, he was a vice president and senior economist with responsibility for the macroeconomics research group.
Evans' personal research has focused on measuring the effects of monetary policy on US economic activity, inflation and financial market prices. It has been published in the Journal of Political Economy, American Economic Review, Journal of Monetary Economics, Quarterly Journal of Economics, and the Handbook of Macroeconomics.
Evans has taught at the University of Chicago, the University of Michigan and the University of South Carolina. He received a bachelor's degree in economics from the University of Virginia and a doctorate in economics from Carnegie Mellon University in Pittsburgh.Evans' personal research has focused on measuring the effects of monetary policy on US economic activity, inflation and financial market prices. It has been published in the Journal of Political Economy, American Economic Review, Journal of Monetary Economics, Quarterly Journal of Economics, and the Handbook of Macroeconomics.
