Chicago Fed chief thinks data is in his corner when it comes to changing policy

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Charles Evans believes 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. 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 10 days ago, 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

Economists expect a fierce debate about whether the Fed should take more action to stimulate growth when its policymaking body, the Federal Open Market Committee, meets June 19 and 20.

Evans is not a voting member of the committee this year. 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 at Jackson Boulevard and LaSalle Street.

"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."

An evolution

Nothing about Evans, 54, hints at the unconventional. He's a mild-mannered policy wonk who reads economic literature on the treadmill. Known as Charlie, he lives in Glen Ellyn with his wife and two children. He loves to play golf.

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 who briefly taught at Carnegie Mellon, 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.

The trio studied years of economic data and started building models to match the data. 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.

But Evans had no idea how quickly his theories would be tested in the real world.

He rose from head of research at the Chicago Fed to president in 2007. He succeeded Michael Moskow, a popular business figure in Chicago who had led the regional bank for 13 years. Moskow had convinced Evans to stay at the bank in 2003 when Evans was considering leaving to become a professor at Oberlin College.

Evans is the first to admit he had little idea what he would encounter in his first few months on the job.

"I think most people thought (Moskow) was handing over a pretty good situation in terms of the economy," Evans said.

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."

Indeed, Evans had basically stepped into a high-profile role in the middle of a catastrophe that his previous jobs in academia and research had not prepared him for. He oversees about 1,400 employees involved in regulation and banking services in addition to helping shape monetary policy. The Chicago Fed has a board of directors made up corporate chiefs, bankers and community leaders. The president also regularly meets with an advisory council that includes small-business owners, farmers and labor interests.

Under Moskow, the bank had increased its outreach to constituents in its district, which compromises northern Illinois, northern Indiana, Iowa, southern Wisconsin and Michigan except for the Upper Peninsula.

The public speaking came easy for Moskow, who had worked in senior management in the private sector and in high-level government jobs. It took some time for Evans to grow into the CEO role.

"When he first started as president, he seemed quite nervous and unsure of himself," Christiano said.

Behind the calm and methodical exterior, though, is a competitive spirit, friends and associates say. Several years ago, some friends invited him on a golf trip where they played a tournament. After finishing last for a few years, Evans decided to amp it up, taking lessons and buying new clubs. He has won the tournament the last two times and has a traveling trophy to show for his accomplishment.

"I'd give anything to have that cup in this article and show those guys," Evans said.

Emphasis on employment

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."

Evans didn't reach his views alone on the dangers of long-term unemployment on workers and economy. His director of research, Daniel Sullivan, is a labor economist who has studied the relationship between unemployment and wage growth and the cumulative effects of unemployment.

Those concerned about inflation say more Fed stimulus will not help because the labor problems are structural, including, for example, a lack of desirable skills among the jobless.

Evans doesn't buy the skills mismatch story as a major cause of unemployment.

"I've heard these stories and … I bring a bit of skepticism to these comments," he said. "They used to employ these people. Where did they go?"

Voicing his concerns

Instead of just airing his views in private meetings, Evans went public. He first staked out his policy position in a speech at a banking conference in Rome in October 2010, when the jobless rate was 9.6 percent.

He told the audience that the unemployment rate should be closer to 7 percent. He ratcheted up the dialogue in speeches and media appearances last year.

"Suppose we faced a very different economic environment: Imagine that inflation was running at 5 percent against our inflation objective of 2 percent," he told a London audience in September. "Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn't any doubt. They would be acting as if their hair was on fire."

But Evans has a problem. It's hard to have aggressive monetary policy when short-term interest rates are already near zero.

One of his solutions is for the Fed to pledge to keep rates near zero until targets on either unemployment and inflation are hit. His triggers are 7 percent for unemployment and 3 percent for inflation. If either target were hit, the Fed should back off, Evans said.

Such sharpened guidance would boost the confidence of households and businesses to spend money instead of keeping it in the bank, he said. Evans also said the Fed should consider buying more mortgage-backed securities to support the housing market.

The speeches were just the opening act. In November he took his strongest action to date by disagreeing with the FOMC's decision not to change monetary policy. He dissented again in December.

It sounds subtle, but it was a big step. His past two predecessors at the Chicago Fed had never dissented from the consensus view at the FOMC, Evans said.

"I was extremely reluctant to push things to the point of dissenting last fall," Evans said. "I am normally quite comfortable with the consensus positions. But I did get to the point where I just thought that the economic literature as I understand it, the number of people who are staking out analyses which indicated that more accommodation was appropriate, was completely in line with my viewpoints."

In January, the Fed didn't take any action. But in a possible nod to Evans, it pledged its intent to hold down the federal funds rate through late 2014.

Christiano, his collaborator at Northwestern, applauds Evans' courage in the face of much criticism.

"To be honest, when I knew him as a young guy, I didn't anticipate this kind of strength, leadership and vision," he said. "It's kind of cool to watch."

asachdev@tribune.com

Twitter @ameetsachdev

Charles Evans, president and CEO of the Federal Reserve Bank of Chicago

Family: Wife Ann, and two children, ages 19 and 24.

Why he's speaking out: The Fed is supposed to achieve two goals through its monetary policy: support maximum employment and control inflation. Evans believes the Fed isn't meeting the jobs goal, as unemployment remains high.

Golf handicap: "At best a 16."

Hobbies: "I always fail the hobby question." A past profile listed one of his hobbies as gardening. After reading the story, family friends gave Evans a rake as a gift, joking that they had never seen him use one.

Personal: Born in Greenville, S.C., his family moved to Alexandria, Va., when he was young. He attended T.C. Williams High School, made famous in the movie "Remember the Titans," which is based on actual events in 1971 when the school hired its first black football coach.

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