Ryan Avent, of The Economist, Supports Zero Percent Interest Rates Until Full Employment

This is part of the series highlighting supporters of pro-jobs policies. An updated list of supporters can be found here.

Ryan Avent, in a reaction to a Financial Times interview of San Francisco Fed President John Williams, has come out in support of overshooting the FOMC’s inflation target rather than the more conservative approach of tightening monetary policy before the US reaches full employment.

 Mr. Avent specifically reacts to this quote from the article:

“In his own economic forecast, Mr Williams said, the Fed will raise interest rates in the middle of next year with the unemployment rate at about 6 per cent, inflation at 1.5 per cent and ‘everything moving in the right direction’.‘At that point if we don’t start to adjust monetary policy there’d be a risk of overshooting,’ he said. ‘You don’t wait until you’re at full employment before you start to raise interest rates from zero.’”

Mr. Avent disagrees with Mr. William’s assessment of monetary policy arguing that her has not learned from the Great Recession. Stating:

“So you’re on the FOMC. You have plenty of recent, bitter experience with this important assymetry: nominal interest rates can rise as high as they need to in order to combat inflation, but they can only fall to zero before monetary policy becomes much less responsive to economic weakness. How do your views evolve? Not at all, it would seem, if you are Mr Williams, who appears to be suggesting that any risk of overshooting is intolerable. Better to put the current recovery at risk and court future disaster than treat the inflation target symetrically.

Or to put things somewhat differently: in his view, there is no point at which the value of the cushion against the ZLB provided by a rise in inflation over 2% exceeds the cost of that rise in inflation.”

In Mr. Avent’s view:

“The Fed should have learned more from recent experience. When nominal rates are at zero you do wait until full employment, or almost-full employment, before tightening policy. You do that because you want inflation to overshoot, because that is how you provide additional stimulus at the ZLB, and because that is how you avoid landing at the ZLB in the first place. There are many worse macro problems than inflation at 3%! Try overshooting for once!”

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