Higher inflation and a lower rate of savings was advocated at an Evanston economic breakfast at the Hilton Garden Inn today by the president of the Federal Reserve Bank of Chicago, who predicted the continuation of a sluggish economy.

Chicago Federal Reserve President Charles Evans speaking at the Hilton Garden Inn this morning.

The speaker, Charles L. Evans, who serves every other year on the Fed’s Open Market Committee that determines the nation’s monetary policy, said that the economy is locked into a classic “liquidity trap,” whereby the rate of savings is higher than the demand for funds. Normally, the Fed counters such a situation by lowering interest rates, thereby discouraging savings and increasing borrowing. But with interest rates near zero, that prescription has failed to work in today’s economy.

Instead, Evans advocates an approach he calls “price-level targeting.” Under this scenario, the Fed would implement a series of large-scale purchases of assets. This floods the economy with money that typically causes prices to rise. As the inflation rate, reflected by the Consumer Price Index, begins to creep past the ideal level of 2 percent, Evans says, policymakers could then take action to curtail inflation.

The Fed’s dual mandate, Evans noted, is to control inflation and reduce unemployment. While it’s done very well at keeping the inflation rate low, the unemployment rate, at 9.6 percent, has remained stubbornly high. “Given my outlook for only moderate growth over the next two years,” he said, “I don’t see unemployment falling below 8 percent by the end of 2012.”

Even though he acknowledged that the unemployment rate is normally one of the last measures to improve during a recovery, “in the current environment,” Evans said, “slow job growth is symptomatic of a generally weak economy.”

Following his talk, a local business owner was asked what he intended to do differently as a result of hearing Evans’ remarks. The owner, who asked not to be identified, said that he was more inclined to lay off some of his employees. He noted that his sales for the last two years have declined at the rate of about 10 percent a year and that the forecast of a continuing sluggish economy makes him doubt that he can avoid layoffs much longer.

Evans did not hold out much hope for a housing rebound, despite low mortgage rates and lower home prices. Those factors, he said, “suggest housing market conditions will get better as we move further into the expansion, but improvement is likely to be only gradual.”

As for inflation, Evans predicted the rate is likely to remain below what he considers desirable levels for some time. “It is not unreasonable to expect 1 percent inflation in 2012,” he said. “Unless the actual conditions turn out to be very different from my forecast, inflation of less than 1.5 percent in 2013 is a strong possibility.”

He concluded: “I cannot stare at our current projections for high unemployment and low inflation and think that they are consistent with the best policies to address the Fed’s dual mandate responsibility.” 

Charles Bartling

A resident of Evanston since 1975, Chuck Bartling holds a master’s degree in journalism from Northwestern University and has extensive experience as a reporter and editor for daily newspapers, radio...

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