7/3 threshold policy

Interesting take from Charles L. Evans, President and Chief Executive Officer Federal Reserve Bank of Chicago

[PRB summary: Act now, worry later…market intervention (loads of leverage) is always the correct answer.]

7/3 threshold policy

7 - I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent…

3 - Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent…

The economic conditionality in this7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low…

Conclusion: The Need for a Vibrant Economy to Cushion Risks

Finding a way to deliver more accommodation — whether it is monetary or fiscal — is particularly important now because delays in reducing unemployment are costly. An unusually large percentage of the unemployed have been without work for quite an extended period of time; their skills can become less current or even deteriorate, leaving affected workers with permanent scars on their lifetime earnings. And any resulting lower aggregate productivity also weighs on potential output, wages and profits for the economy as a whole. The damage intensifies the longer that unemployment remains high. Failure to act aggressively now could lower the capacity of the economy for many years to come.

Such potential costs would come with the continuation of a subpar pace of economic recovery. The significant risks I discussed earlier – financial disruption from a worsening of the situation in Europe or a messy resolution of U.S. fiscal policy – raise the specter of an even more worrisome outcome. At the moment economic growth is not much above stall speed. Another negative shock could send the economy into recession. And if a recessionary dynamic takes hold, it would be especially difficult to regain momentum.

I have outlined some policy actions that I think can take us in the direction of a more vibrant and resilient economy. Given the risks we face, I think it is vital that we make such moves today. I don’t think we should be in a mode where we are waiting to see what the next few data releases bring.We are well past the threshold for additional action; we should take that action now.