Narayana Kocherlakota is doubling down on the Federal Reserve's policy of low
interest rates intended to stimulate the American economy.
The president of the Federal Reserve Bank of Minneapolis predicted
Thursday that U.S. unemployment won't fall below 7 percent before late 2014,
and inflation will stay below 2 percent. He then repeated his call for the Fed
to keep trying to drive down interest rates for the foreseeable future.
"This forecast suggests that, if anything, monetary policy is currently
too tight, not too easy," Kocherlakota said.
Coming on the heels of evidence in December that members of the central
bank's Federal Open Market Committee are beginning to doubt their efforts to
drive down interest rates, Kocherlakota is casting himself as one of the
leading voices pushing for the bank to stay its long-term course of trying to
lower the cost of borrowing to jump-start the economy.
The speech at the Minneapolis Fed crystallizes a yearlong about-face for
the outspoken Fed official. In 2010 and 2011, Kocherlakota was one of the
regional bank presidents arguing that the central bank could do little to cure
high unemployment because the economy was creating jobs that didn't fit
workers' skills and geography. He said the problem was a structural mismatch
and a fundamentally changed economy. Continued low interest rates, he argued,
would do nothing but raise the threat of inflation.
When a wave of analysis in early 2012 indicated the economy's problems
were not structural, but simply a matter of weak demand that could be
strengthened by lower interest rates, Kocherlakota changed course. In speeches
through the summer and fall, he said the Fed should keep trying to lower
interest rates by buying long-term securities from banks, either until
unemployment falls below 5.5 percent or the medium-term inflation outlook
rises above 2.25 percent.
Fed policymakers decided in December on a similar course of action,
announcing they planned to keep interest rates near zero until either
unemployment falls below 6.5 percent or inflation rises above 2.5 percent.
Kocherlakota took pains Thursday to note that he was speaking only for
himself, not for the Fed, and speeches by other Fed officials Thursday
highlighted growing differences on the committee that sets the nation's
monetary policy.
Esther George, president of the Federal Reserve Bank of Kansas City, said
Thursday "a prolonged period of zero interest rates may substantially increase
the risks of future financial imbalances" and could drive up inflation. James
Bullard, president of the Federal Reserve Bank of St. Louis, told reporters in
Wisconsin, "It is a very aggressive policy and it is making me a little bit
nervous that we are overcommitting to the easy policy," Reuters reported.
The Fed is buying about $85 billion in assets each month to try to
encourage borrowing and spending, and minutes from the Federal Open Market
Committee's December meeting showed several members "thought that it would
probably be appropriate to slow or to stop purchases well before the end of
2013."
While not a voting member of the committee, Kocherlakota, like all Fed
bank presidents, contributes to the policymaking body's discussions. He said
unemployment will continue to fall slowly, and the economy's sluggish growth
is keeping output well below what economists expect based on the nation's
historical growth patterns.
"I see output as continuing to grow slowly -- at around 2.5 percent in
2013 and around 3 percent in 2014," he said. "Note that this growth will do
little in terms of returning the economy to the historical trend."
___
Distributed by MCT Information Services
