The Benefits of Running Hot

In a headline that seems like it could be from The Onion or the Babylon Bee, please consider Chicago Fed president Charles Evans On the Benefits of Running the Economy Hot

In his speech Evans frequently refers to "r*" defined as the "equilibrium (or natural) real interest rate, or the rate consistent with full employment of the economy's productive resources"

Let's now tune in to his thoughts. It was relatively lengthy speech by Evans. Here are the key snips.

It is an understatement to say that our current situation is complex: two years of Covid-19 distress; global supply chains in disarray; strong fiscal, monetary, and financial support; and 7-1/2 percent annual CPI inflation in the U.S.

But monetary policy is not the only game in town. Fiscal and regulatory policies will be crucial complementary tools in many cases—such as when aggregate demand is far too weak or financial excesses loom large. Importantly, these situations are more likely to arise in a low r* environment—when the proximity of the effective lower bound (ELB) reduces monetary policy capacity and investors' views about potential returns may be at odds with the economy's fundamentally lower average rate of return.