Charles Evans on the Fed’s 2024 policy review

It’s not hard to figure out what went wrong with the Fed’s FAIT policy initiative of 2020. Right after adopting a policy containing the phrase “average inflation targeting”, the Fed allowed the average inflation rate to diverge sharply from the roughly 2% average we saw during the period of 1991-2020. They adopted an asymmetric policy of making up for inflation shortfalls, but not inflation overshoots. The result was predictable, and will likely cost Biden another term in the White House.

Former Chicago Fed president Charles Evans has a new paper that discusses what went wrong and how to fix it. In the end, he sees the Fed’s FAIT regime as being relatively sound, and views the recent monetary policy mistakes as being relatively modest. In my view, the policy tweaks he proposes would not be enough to fix the underlying problem. The Fed needs to take a more radical step, either make FAIT fully symmetrical, or (even better) switch to something like NGDP level targeting.

Evans does acknowledge that there was excess demand stimulus in 2021, but in my view he understates the just how far policy went off track. Much of the paper focuses on how supply problems contributed to high inflation in 2021 and 2022, a problem that turned out to be largely transitory.

If you take the longer view, it begins to look like the real problem was nominal—excessive growth in NGDP. Evans suggests that the trend rate of growth in real GDP is about 1.8%. That suggests that NGDP should grow at roughly 3.8% over the long run. Here are the actual growth rates over the past 4 years:

Real GDP, 2019:Q3 to 2023:Q3: 2.0%

Nominal GDP, 2019:Q3 to 2023:Q3: 6.2%

Thus essentially all of the excess inflation (for the GDP deflator) was due to excessive growth in demand, at least in an accounting sense. NGDP growth was 2.4%/year above the level required to hit the inflation target, a total overshoot of roughly 10% over 4 years. That NGDP overshoot is roughly comparable to the inflation overshoot over the past 4 years. Indeed, it’s surprising that inflation was not even worse, as the PCE index has averaged about 4% inflation over the past 4 years, a bit below the figure you might expect from NGDP overshoot. If in 2019 you had been told that we’d have 6.2% NGDP growth, no Covid, and no Ukraine War, what sort of PCE inflation rate would you have expected? Be specific.

In fairness, the excessive growth in demand may have caused RGDP to slightly overshoot trend growth. Slower NGDP growth would have shown up as both slower RGDP growth and slower inflation. But as long as NGDP growth stayed close to 4%/year trend line, I would have expected RGDP to return fairly close to its natural rate, once Covid was over.

More importantly, I think a lot of inflation targeting advocates overlook the fact that a level targeting approach makes a severe inflation overshoot much less likely to occur in the first place. There’s far too much discussion of whether the Fed should have begun raising rates at this meeting or that meeting, and not enough discussion of what sort of monetary regime would create stabilizing speculation in the financial markets.

With a 4% NGDPLT policy, market interest rates on Treasury securities would have risen sharply in late 2021, as participants saw that NGDP was likely to overshoot the trend line and require subsequent contractionary policy. That rise in rates would have made the NGDP overshoot much smaller in the first place. And as long as NGDP is on track, any inflation overshoots due to supply side factors really will be “transitory”.

Based on what I’ve been reading from various Fed officials, I believe the Fed will fail to incorporate this perspective in its upcoming 5-year review, and hence will fail to come up with the sort of policy regime that would prevent a repeat of the mistakes of 2008-09, or the mistakes of 2021-22.

HT: David Beckworth

Update: I recently did a podcast with Dan Schulz, discussing everything from art to economics. Here are some links:



25 Responses to “Charles Evans on the Fed’s 2024 policy review”

  1. Gravatar of Lizard Man Lizard Man
    30. November 2023 at 16:18

    Although an asymmetric average inflation target is an oxymoron, wouldn’t it precisely avoid 2008-2009 and recapitulate 2021-2022? What am I missing?

  2. Gravatar of ssumner ssumner
    30. November 2023 at 20:17

    “recapitulate” Do you mean recreate?

  3. Gravatar of Michael Sandifer Michael Sandifer
    1. December 2023 at 01:29

    There was discussion on Twitter this week about NGDI versus NGDP data. I created a chart with NGDI versus trend, and while it initially overshot, it has already returned to trend, or near it, depending on how you calculate the trend line.

    I don’t know which series to trust, on the surface. Jason Furman likes to average them. It does suggest a lot of uncertainty about the data, and does undermine your strong point about NGDP remaining above trend.

    Given market data, I’m more inclined to trust NGDI right now. That’s because inflation expectations continue to fall below target, while the S&P 500 is near its pre-pandemic trend line. Also, the Vix has fallen back to its pre-pandemic level.

    Also, if you just look at inflation and inflation expectations over this period, their movements are much more consistent with NGDI than NGDP.

    I’m confident that, at the moment, monetary policy is expected to be near equilibrium soon.

  4. Gravatar of Michael Sandifer Michael Sandifer
    1. December 2023 at 01:51

    Please disregard that comment. A typo in my code led to an incorrectly calculated trend line. NGDI is still above trend.

    However, there is a lot of uncertainty about recent NGDP/NGDI figures, given the sharp divergence and rather large revisions to some NGDP data.

  5. Gravatar of Junio Junio
    1. December 2023 at 06:48

    Love the podcast episode!

  6. Gravatar of spencer spencer
    1. December 2023 at 11:27

    Latest gdpnow estimate: 1.2 percent — December 01, 2023

    So, what’s R * right now?

  7. Gravatar of Doug M Doug M
    1. December 2023 at 12:37

    It is interesting that as soon as the Fed officially adopts inflation targeting, they massively overshoot inflation.

    The Fed has a credibility problem. They had a credibility problem before they adopted FAIT, and I was skeptical at that time that FAIT was a meaningful policy change vs. a stated objective with no intention to change business as usual. A few years later, I have been proven correct for my skepticism.

    We must judge policy by the results rather than their stated objectives. And, the results match what the policy was designed to achieve.

  8. Gravatar of copans copans
    1. December 2023 at 15:29

    Ditto Junio. I have sent out links to the podcast to 8 people already. The asset bubble discussion was the most cogent presentation of Scott’s thinking on this topic I have seen him give.

    One quibble, I think that Kidnapped is not mere escapism, but serves as a bracing dialectic between the Romantic and the Rationalist threads that run through 18th Century Scottish culture. Looking forward to a post on Gene Wolfe.

  9. Gravatar of Solon of the East Solon of the East
    1. December 2023 at 15:35

    Excess demand…probably. But the United States is a place where building housing is seriously constrained, aggravated by an de facto open borders policy…

  10. Gravatar of ssumner ssumner
    1. December 2023 at 16:12

    Thanks Junio and copans, I agree that Kidnapped is a serious work of fiction. What I meant is that it’s widely (and wrongly) perceived as just a children’s story. I should have made that clearer.

  11. Gravatar of Junio Junio
    1. December 2023 at 20:50

    Scott, I’m curious, what do you think defines a good economist? Sorry if this seem a bit out of the air, but I happened to think about it as I was watching the podcast episode.

  12. Gravatar of Jeff Jeff
    2. December 2023 at 08:38

    Evans is about as reliable a commentator on FAIT as Kissinger was on Vietnam. Academics-turned-policy-gurus seem to have a knack for revisionist history.

    Price stability is at hand. Price stability “with honor”!

  13. Gravatar of ssumner ssumner
    2. December 2023 at 10:11

    Junio, I’m sure there are many factors. But one is being able to look at a complex situation and to be able to see the underlying economic forces that explain the key events. Lesser economists focus on superficial surface events, and fail to see the deeper causes.

  14. Gravatar of steve steve
    2. December 2023 at 11:53

    What would your proposed remedies do to unemployment?


  15. Gravatar of ssumner ssumner
    2. December 2023 at 20:22

    Steve, I think 4% NGDPLT would produce lower unemployment than our current policy regime. Maybe not immediately, but in the long run.

  16. Gravatar of Todd Ramsey Todd Ramsey
    3. December 2023 at 07:14

    I guess this means we have to wait until the 2029 review for the Fed to establish a NGDP securities market?

  17. Gravatar of Steve Steve
    3. December 2023 at 22:12

    The result was predictable, and will likely cost Biden another term in the White House.

    If Brandon manages to lose in 2024, it will be because the DNC Hitler Youth went even crazier in the summer of 2024 than they did in the summer of 2020.
    Protestors in Philadelphia stand outside of a Jewish & Israeli owned falafel restaurant

    “Goldie, Goldie you can’t hide, we charge you with genocide”

  18. Gravatar of ssumner ssumner
    5. December 2023 at 09:10

    Steve, Yes, the term ‘genocide’ is like racism. It’s been overused to the point where it’s almost meaningless.

  19. Gravatar of Junio Junio
    5. December 2023 at 14:49

    Scott, what do you think about the definition of racism that’s defined as racial prejudice plus power, not just racial prejudice as typically used?

  20. Gravatar of ssumner ssumner
    5. December 2023 at 16:41

    Junio, Of course people can define words as they like, but that seems like an unusually silly definition. I’d prefer racial antipathy—dislike of other races or ethnic groups. Lots of people have racial prejudice without being racist.

    The left overuses the term racism to the point that when a real racist comes along—say Donald Trump—the electorate has tuned them out. That’s a shame.

  21. Gravatar of Solon of the East Solon of the East
    6. December 2023 at 05:35

    Productivity increases 5.2% in Q3 2023; unit labor costs decrease 1.2% (annual rates)
    Productivity increased 5.2 percent in the nonfarm business sector in the third quarter of 2023; unit labor costs decreased 1.2 percent (seasonally adjusted annual rates). In manufacturing, productivity decreased 0.8 percent and unit labor costs increased 6.2 percent.

    —30— BLS 12/6

    Somehow, I don’t think demand is the problem. Or supply.

    Or even wages.

    We should be worried about inflation?

  22. Gravatar of Kester Pembroke Kester Pembroke
    7. December 2023 at 12:39

    What’s really interesting about this narrative though is that it disproves mainstream economic theory.

    When the Fed bought the gilts the amount paid for them will have been the future discounted value of the gilts held to maturity relative to the alternative of holding floating rate reserves for the same period of time.

    Therefore swapping between them at any point in time should be revenue neutral from the issuers point of view. If it isn’t then the mainstream ought to have some explaining to do since that’s what their marvellous mathematical models predict.

  23. Gravatar of Sara Sara
    10. December 2023 at 06:28

    In the video you said:

    “I think actually maybe benefited more from reading bits of philosophy”

    Is that the quote of a genius? I’m asking for a friend.

    “I think actually maybe…”


    Alex Jones is more articulate, and he’s on “human male vitality pills”, also known as “steroids”, and has a high school degree.

    For the record, I would certainly hope you’ve read more than “bits” of philosophy, otherwise you are unworthy of the title bestowed upon you. And your incessent use of teenage exlamations such as the use of the word “like” is also unbecoming. You have a Ph.D in Economics, yet you talk like a sailor. If nobody knew who you were, and they heard you speak, they would think you were selling crack cocaine on a street corner, trying to bang prostitutes while on shore duty, or swinging a bat at your political opponents while simulatenously screaming fascist.

    Did they not teach communication skills at the University of Chicago?

    Did you not learn anything about communication while at Bentley for 40 years?

    Sorry, but you are the epitome of everything that is wrong with academy. Your destructivist, neo marxist generation of thugs, gangsters, ingrates, degenerates, all of whom are incapable of expressing themselves and dressing themselves, has now become a real threat to the survival of the republic. You are supposed to be the vanguard of knowledge, instead you reduce yourself to the lowest common denominator. Your entire profession of modern day physiocrats have become completely untethered from reality. It’s hard to distinguish you from the street thug, and that’s the sign of a banana republic.

    I Like, I like graduated, you know, like OMG, like University of Chicago Yo. I’m a genius, yo, like I have like a Ph.D. Look at me.

  24. Gravatar of ssumner ssumner
    10. December 2023 at 08:02

    Kester, Ever heard of an inflation tax?

    Sara, And yet you spend a big chunk of your life reading my blog, listening to my podcasts and writing pro-Putin nonsense in the comment section. I ask you, is that the mark of a sane person?

  25. Gravatar of Michael Sandifer Michael Sandifer
    10. December 2023 at 21:33

    Sara must have ordered some of those Alex Jones brain boosting supplements, which after it was revealed contained dangerous levels of lead, were put on sale by Jones for 50% off.

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