charles l evans : the fed ’ s dual mandate responsibilities – maintaining credibility during a time of immense economic challenges speech by charles l evans, president of the federal reserve bank of chicago, at the michigan council on economic education, michigan economic dinner, detroit, michigan, 17 october 2011. * * * the enormity of the problem in the summer of 2009, the u. s. economy began to emerge from its deepest recession since the 1930s. but today, more than two years later, conditions still aren ’ t much different from an economy actually in recession. gross domestic product ( gdp ) growth was barely positive in the first half of 2011. the unemployment rate is 9. 1 percent, much higher than anything we had experienced for decades before the recession. and job gains over the past several months have been barely enough to keep pace with the natural growth in the labor force, so we ’ ve made virtually no progress in closing the “ jobs gap ”. with unemployment having lingered for so long at rates around 9 percent, it is perhaps natural that some would begin to think that nothing more can be done to improve upon this situation. however, i don ’ t agree. before seriously contemplating doing nothing, it is important to realize just how enormous this economic problem really is. to put this in perspective, consider that prior to the recession, most analysts thought the long - run trend growth rate of gdp was about 2 - 1 / 2 percent per year. given the sharp drop in output during the recession and lackluster early recovery, gdp is currently below its potential by nearly 7 percent, or $ 1 trillion dollars. 1 just prior to the recession, the unemployment rate averaged between 4 - 1 / 2 and 5 percent. it peaked at 10. 1 percent during the recession and, as i just noted, is still 9. 1 percent today. in terms of jobs, payroll employment is about 6 - 1 / 2 million below its pre - recession level. these are massive shortfalls in output and employment. it does not appear as if these gaps are going to be reduced significantly any time soon. real gdp growth has been anemic so far this year. gains in employment have slowed markedly. even though credit conditions overall have been improving, many households and small businesses still seem to be having trouble getting credit. in addition, the repair process in residential real estate markets is painstakingly slow, and households are still in the process of paring debt and adapting to the huge losses in real estate and

rises above their long - run target? to the degree that the public doubts that we will, current accommodation is reduced because expected future short - term rates, interest rate uncertainty and associated risk premiums all will be higher than they otherwise would be. premature talk of exit strategies or assertions of inflation targets as ceilings only feed the perception that we are not committed to the low rates. and thus, i think we are seeing such added restraint today. woodford ( 2011 ). again, see evans ( 2011 ). rogoff ( 1985 ). bis central bankers ’ speeches a proposed policy i believe that we can substantially ease the public ’ s concern that monetary policy will become restrictive in the near to medium term and, hence, reduce the restraint in expanding economic activity. this can be done by clearly spelling out in our policy statements the conditionality of our dual mandate responsibilities. what should such a statement look like? i think we should consider committing to keep short - term rates at zero until either the unemployment rate goes below 7 percent or the outlook for inflation over the medium term goes above 3 percent. such policies should enable us to make progress toward our mandated goals. but if this progress is too slow, then we should move forward with increased purchases of longer - term securities. we might even consider a regime in which we reevaluate our progress toward our policy goals and the rate of purchase of such assets at every fomc meeting. let me note several aspects to this policy conditionality. as i just said, i subscribe to a 2 percent target for inflation over the long run. however, given how badly we are doing on our employment mandate, we need to be willing to take a risk on inflation going modestly higher in the short run if that is a consequence of polices aimed at lowering unemployment. with regard to the inflation marker, we have already experienced unduly low inflation of 1 percent ; so against an objective of 2 percent, 3 percent inflation would be an equivalent policy loss to what we have already experienced. on the unemployment marker, a decline to 7 percent would be quite helpful. however, weighed against a conservative estimate for the natural rate of unemployment of 6 percent, it still represents a substantial policy loss. indeed, weighed against a less conservative long - run estimate of the natural rate, it is a larger policy loss than that from 3 percent inflation. accordingly, these triggers remain quite conservatively tilted in favor of disciplined inflation performance over enhanced growth and employment, and