Fed must act now to boost economy, Evans says

While 3-percent inflation may sound "shocking," he said, research shows that central banks should fight liquidity traps by allowing inflation to run above target over the medium term.

Since high U.S. unemployment is probably due to the effect of a liquidity trap rather than a structural shift in the economy, Evans said, added monetary stimulus is justified.

And if it turns out, he said, that the real problem was indeed structural and easier monetary policy sparks a rise in inflation, the Fed can simply tighten policy before it threatens to reach the hyperinflationary levels of the 1970s.

...

The audience of several hundred entered the large convention center where Evans spoke under the watchful eyes of half a dozen armed members of the county sheriff's department, who were on site because of a threatened demonstration by Occupy Muncie.

Evans had previously suggested setting the unemployment trigger for monetary policy tightening at 7 percent but did not mention any specific figure in his prepared remarks on Monday.

The Fed's policy-setting panel meets next week to discuss what, if any, action to take to boost the economy. While many Fed officials appear to support some change in Fed communications, only a few have said they would support Evans' proposal.

Next week will be the last time Evans votes on the panel until 2013.

(Via DeLong twitterstorm)