Charlie Evans on the Past, Present, and Future of U.S. Monetary Policy

Episode Summary

Executive Summary: David Beckworth interviews former Chicago Fed President Charles Evans about his Fed career, the evolution of monetary policy analysis, and lessons from the Great Financial Crisis, the Evans rule, r-star, and the Fed’s framework reviews. Evans argues that explicit inflation targets and flexible average inflation targeting shaped policy, but the pandemic exposed their limits and raised questions about how to handle supply shocks, communication, and the right policy framework going forward.

Main Topics: Evans’s Fed career and institutional responsibilities (Priority: 5/5): Evans describes his 31 years at the Fed, including research, supervision, payments, and leadership of the Chicago Fed, emphasizing that a reserve bank presidency involves much more than FOMC work. Early monetary policy research and the shift from RBC to VARs (Priority: 5/5): The conversation revisits Evans’s academic work with Christopher/Christiano and Eichenbaum on VAR identification, the price puzzle, and why interest-rate instruments became central to monetary policy analysis. How the FOMC operates and crisis-era policymaking (Priority: 5/5): Evans explains internal preparation, staff inputs, regional intelligence, and the negotiation process inside the FOMC, especially during Greenspan, Bernanke, and crisis-era decisions. The Evans rule and state-contingent forward guidance (Priority: 5/5): Evans details how his speeches on unemployment and inflation thresholds evolved into the December 2012 Evans rule, and how this helped strengthen accommodation when the recovery was weak. R-star, restrictive policy, and uncertainty about neutrality (Priority: 4/5): The discussion turns to r-star as a guide to whether policy is restrictive, why estimates are uncertain, and how lower trend growth, demographics, and debt may affect the neutral rate. Fed framework review, explicit inflation target, and FAIT (Priority: 5/5): Evans defends the importance of the explicit 2% inflation target and discusses how the 2020 flexible average inflation targeting framework helped anchor expectations but also contributed to policy being too slow to tighten. Future framework debates and nominal GDP targeting (Priority: 4/5): The conversation closes with reflections on whether the Fed should rethink treatment of supply shocks and whether nominal GDP targeting might enter future debates as a broader outcome-based framework.

Key Arguments: Interest rates became the key monetary policy instrument because money aggregates were increasingly unreliable amid financial innovation, and VAR-based research helped the profession converge on that view. The Evans rule emerged because markets were not responding enough to low-rate policy; state-contingent guidance was needed to make accommodation credible and effective. The Great Financial Crisis forced a major shift to QE and balance-sheet policy; early research on Japan and debtless operating environments helped prepare the Fed intellectually for these tools. An explicit 2% inflation target was crucial because vague commitments risk being interpreted as a ceiling; clear communication anchors expectations and supports credibility. Flexible average inflation targeting was well-intentioned but in practice delayed tightening in 2021, as the Fed expected inflation to come in through the front door rather than via large supply shocks. R-star is inherently uncertain and hard to measure; lower trend growth, aging demographics, and debt pressures likely keep it low over time, though market rates and risk premia can move it. The Fed should remain humble about identifying supply shocks and likely needs to evaluate more indicators, not fewer, when setting policy after the pandemic experience. Nominal GDP targeting is worth discussing because it focuses on total demand and can better accommodate the interaction of inflation and real activity, but it is not a simple cure-all.

Data Points: Tenure at the Fed: 31 years - Evans says he spent 31 years at the Federal Reserve, starting as an economist in Chicago in 1991. Chicago Fed presidency: 2007 to 2023 - He served as President and CEO of the Chicago Fed during this period. FOMC membership: 15 years - Evans notes he served 15 years on the FOMC. QE1 purchases: $1.25 trillion of MBS, agency debt, and $300 billion of Treasuries - Evans describes the March 2009 large-scale asset purchase program. QE2 purchases: $600 billion of Treasuries - He references the 2010 second round of quantitative easing. Unemployment threshold in Evans rule: 6.5% - By December 2012, the FOMC adopted guidance tied to unemployment falling below this level. Inflation threshold in Evans rule: 2.5% - The rule also allowed for an inflation trigger above this level. Initial Evans guidance proposal: 7% unemployment and 3% inflation - Evans says his original public proposal was more modest than the later adopted thresholds. Date guidance example: mid-2013 - The August 2011 FOMC initially used calendar guidance saying rates would stay low until around this time. Explicit inflation target: 2% - The Fed formalized a 2% PCE inflation objective in 2012 and Evans describes it as the anchor for expectations. FATE overshoot language: Moderately above 2% - Evans characterizes the 2020 flexible average inflation targeting approach as allowing only a modest overshoot. Peak CPI inflation mentioned: 9% - He cites the post-pandemic surge in CPI inflation as evidence that expectations were tested but remained anchored. Peak PCE inflation mentioned: over 6% - Used to illustrate the scale of the 2021-22 inflation surge. Trend GDP growth estimate: about 1.75% - Evans argues lower trend growth is a key structural factor influencing r-star. 1980s trend GDP growth: about 3.25% - He contrasts current trend growth with the stronger 1980s expansion. R-star estimate range mentioned: about 0.5% to 2.2% - Evans surveys different r-star estimates from the literature. Current funds rate target reference: 5.25% - He compares today’s funds rate to past episodes when policy was restrictive.

Pivotal Quotes: "It is difficult to overstate the importance of the explicit 2% commitment within the larger strategy statements." — Charles Evans: Evans explains why making the inflation target explicit mattered for anchoring expectations and guiding policy. "The problem is markets keep thinking we’re going to raise the funds rate. We just did exit principles. Markets keep pricing in a higher funds rate. So what we’re doing isn’t having the same effect." — Charles Evans: He describes the motivation behind his push for state-contingent forward guidance and the Evans rule. "I think that the flexible average inflation targeting framework, definitely. And the implementation of it in the September 2020 forward guidance, that’s really... contributed to the delay in tightening monetary policy." — Charles Evans: Evans links FAIT and the Fed’s 2020 guidance to the delayed response to rising inflation.

Implications: Listeners should expect the Fed to keep debating its framework, especially how to react to supply shocks, whether to preserve makeup policy, and how much weight to give r-star. The discussion suggests communication, flexibility, and outcome-based policy will be central.