Chicago Fed President Charles Evans delivered a speech at the University of Wisconsin today. There he laid down “three possibilities concerning low inflation and low unemployment and their implications for monetary policy”.
The first one being the “overheating story” and said that the “risks are not particularly high”. Evans pointed out that the so called “Phillips curve” is much “flatter” than it was. And, adding to that “inflation expectations low and well anchored, and a lack of fuel from strong wage growth”, there is no “outsized risk of a breakout in inflation”.
The second scenario is that “inflation is low because the sustainable rate of unemployment is actually much lower than the FOMC’s 4-1/2 percent estimate”. Therefore, “unemployment rate really isn’t putting any pressure on labor markets.” In this case, “the risks of overheating would be lower, and perhaps interest rate adjustments could be smaller.”
In the third scenario, “unemployment running below its natural rate, u*, without rising inflation is due to labor market inefficiencies that are outside the purview of monetary policy.” He added that
“let’s consider the possibility that unemployment remains low and some structural problem keeps wages and prices from rising to attract workers. Is this really a problem that monetary policy is suited to address? I think the answer is no.”
Finally, Evans also noted that Fed is facing “low inflation trends and low inflation expectations”. And, ” some cyclical upturn in inflation is actually welcome because it should help solidify expectations symmetrically around our 2 percent objective. This is necessary for achieving our inflation target on a sustainable basis.”