Federal Reserve is (morally) Bankrupt

A senior member of the Federal Reserve has warned that the US economy is in a “liquidity trap” and signalled support for more action to boost the recovery.

Charles Evans, president of the Chicago Fed, said that “in my opinion, much more policy accommodation is appropriate today” because “the US economy is best described as being in a bona fide liquidity trap”, a point where ultra-low interest rates and high savings rates conspire to make monetary policy ineffective.

Speaking in Boston on Saturday, he said the Fed should consider using a temporary target for the level of prices instead of the rate of inflation in order to drag the economy out the trap by convincing businesses and consumers to stop saving and start investing and spending.

Such a move would be in addition to a fresh asset purchase programme, or quantitative easing, now under consideration.

“I think there are special circumstances when price-level targeting would be a helpful complement to our current and prospective strategies,” Mr Evans said.

A target for prices is one way the Fed could try to persuade the public that inflation will recover in future and thereby stimulate the economy.

But many Fed officials are not yet persuaded that a price level target makes sense. In an interview last week with the Financial Times, James Bullard, the president of the St Louis Fed, said he was “sympathetic” to the idea of a price level target but that “I don’t think we’re going to go in that direction any time soon”.

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