Charles Evans, president of the Federal Reserve Bank of Chicago, favors much more aggressive policies to push down the unemployment rate.
CHICAGO — Charles Evans says the nation’s unemployment rate is unacceptably high, and he has a plan to get Americans back to work.
In an election year, this sounds like political rhetoric. But Evans isn’t running for office.
As president and chief executive of the Federal Reserve Bank of Chicago, he’s waging a campaign of his own, and it’s radical — at least for a central banker, whose every public statement is parsed for clues about the economy.
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Federal Reserve Chairman Ben Bernanke has dismissed his ideas as reckless. Slate magazine called Evans ingenious and asked, “Can this man save the American economy?”
Evans’ work is wonkish, and he says little to make it more accessible. He talks about the recession like a professor would, throwing out statistics and terms like “shadow banking sector” and “liquidity trap.”
But Terry Mazany, CEO of the Chicago Community Trust and a director at the Chicago Fed, said Evans has clearly found his voice at the national level.
“Given my work on the ground dealing with homelessness and unemployment, to have a (Fed) president who feels very passionately about his responsibility to lead efforts to lower the unemployment rate means a lot,” said Mazany, who heads one of the nation’s largest community foundations. “It should mean a lot to the people of this metropolitan area.”
Evans’ big idea is this: He says the Federal Reserve, which establishes national monetary policy, should be doing more to goose the economy, which would help create jobs.
Critics say that trying to stimulate more growth would only lead to more inflation and not have much effect on reducing the jobless rate. Evans counters that the central bank should tolerate higher inflation, as much as 3 percent, which is above the Fed target of 2 percent.
Higher inflation is worth the risk, Evans said, if more aggressive policies help bring unemployment down from its current 8.2 percent.
But the Fed, especially since the burst of inflation in the 1970s, has done whatever necessary to keep prices in check. So Evans’ willingness to tolerate slightly higher inflation has been greeted as if he were suggesting that the Earth is flat.
The criticism doesn’t seem to faze him. He’s secure in his views because he is an expert in his field, not a banker. He has a doctorate in economics and has done years of research on how changes in monetary policy affect the national economy.
Even before the dismal May jobs report came out, with unemployment ticking up from 8.1 percent, Evans was gaining supporters. Eric Rosengren, president of the Boston Fed, said at the end of May that the Fed should act to boost the money supply.
Evans this year is not a voting member of the Fed’s policymaking Federal Open Market Committee (FOMC). The peculiarities of the Federal Reserve system allow him a vote every other year.
But Evans has made his mark on the national debate and at the Chicago bank’s imposing neoclassical headquarters, in the heart of the city’s financial district.
“It gives the public confidence when you see the Fed isn’t some monolithic, one-size-fits-all set of people who blindly agree like lemmings,” said Anil Kashyap, a professor of economics and finance at the University of Chicago Booth School of Business and a consultant to the Chicago Fed. “It also serves the Fed well to have these voices making these arguments.”
Nothing about Evans, 54, hints at the unconventional. He’s a mild-mannered policy wonk who reads economic literature on the treadmill.
His willingness to step out on his policy views are rooted in his training and research, his faith in the Fed’s mission and a belief that extraordinary times call for extraordinary measures.
The Federal Reserve is America’s central banking system, managing the nation’s currency, money supply and interest rates. It is composed of the presidentially appointed Board of Governors and 12 regional banks located in major cities. The Fed pulls strings in the economy by expanding or shrinking the money supply, partly through the control of interest rates that private banks charge each other. Its decisions do not have to be approved by the president or lawmakers, but it is subject to congressional oversight.
Evans joined the Chicago Fed’s research department in 1991, a few years after finishing his doctorate in economics from Carnegie Mellon University in Pittsburgh. Martin Eichenbaum, his adviser at Carnegie Mellon who had moved to Northwestern University, recruited him to Chicago from the University of South Carolina, where Evans was teaching.
The pair joined Lawrence Christiano, another Northwestern economics professor, to begin looking at how monetary policy affects the economy. Their research ran counter to the conventional wisdom in the 1980s that the economy was best left to its own devices and that growing or contracting the money supply had little influence.
After about 10 years of research, they came up with a formula that recognized the importance of monetary policy, turning conventional wisdom on its head.
“That work has caused all three of us to change our views about how the economy was put together,” Christiano said.
They weren’t the only economists coming to the same conclusion around the same time. This new way of thinking about monetary policy has been embraced by economic giants such as Bernanke and has influenced central bankers around the world.
He rose from head of research at the Chicago Fed to president in 2007.
But financial markets started to swoon in the second half of 2007. At his first FOMC meeting in September, Evans voted with the rest of the committee to cut short-term interest rates, called the federal funds rate, to 4.75 percent from 5.25 percent.
It was a big cut, and more followed as the banking crisis intensified in 2008 with the collapse of Bear Stearns and Lehman Brothers. By the end of the year, the central bank had dropped short-term interest rates to roughly zero.
“It still wasn’t clear that we had hit bottom or that we were going to hit bottom anytime soon,” Evans said. “People were holding their breath at that point.”
Evans can tick off the grim toll of the recession from memory: U.S. real gross domestic product declined by more than 4 percent. More than 8.5 million jobs were lost, and the unemployment rate doubled to 10 percent. The household sector lost more than $13 trillion in wealth.
Evans has also seen the fallout firsthand.
A native of South Carolina, he’s the youngest of three boys. His father was a life-insurance executive who was a B-17 navigator during World War II; his mother worked as a receptionist in a dental office.
His oldest brother, Bill, who is 12 years older than Evans, owns a La-Z-Boy furniture store in Columbus, Ga. His sales are down about 25 percent in the past three years.
“I’m not smart enough to understand the big picture that Charlie watches, but I give him my perspective,” Bill said.
Closer to home, Evans’ 24-year-old daughter graduated from college two years ago and has had trouble finding a teaching job. She’s working as an aide at a suburban elementary school.
“She’s moved from unemployment to underemployment, and we’re thrilled by that progress,” Evans said dryly.
The anecdotal evidence combined with data showing that households and businesses were gun-shy in their spending convinced him that the Fed needed to do more to ease unemployment.
He recognizes that further policy moves would increase the risk that inflation could rise above the 2 percent level the Fed considers ideal for long-term economic growth. But he said the harm from a long period of high unemployment is greater than a temporary increase in prices.
“All of a sudden, you could get people who have permanently lost their skills and attachment to labor force that would affect their potential,” Evans said. “That’s not priced into financial markets.”