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
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