News Column

Fed's Kocherlakota Speaks of 'Monetary Accommodation '

Jan. 15, 2013

Adam Belz

Narayana Kocherlakota said last week that, if anything, Federal Reserve monetary policy has been "too tight."

On Tuesday, the president of the Federal Reserve Bank of Minneapolis got specific.

The Fed is already buying roughly $85 billion in assets from banks each month in to keep interest rates low and encourage economic growth. The central bank's policy-making Federal Open Market Committee said in December that it would try to keep interest rates down for a while -- either until unemployment falls below 6.5 percent or inflation starts to rise above 2 percent.

Kocherlakota said Tuesday that the Fed's commitment should be even deeper.

"In my view, it would be appropriate for the committee to increase the level of monetary accommodation by lowering the unemployment rate threshold to 5.5 percent," he told the Financial Planners Association of Minnesota in a prepared speech in Golden Valley. "Some might be concerned that this move would give rise to undue inflationary pressures. I see that possibility as unlikely -- and, even if I'm wrong in my assessment, the committee's forward guidance provides tight inflation safeguards."

Kocherlakota has become perhaps the loudest voice at the Fed calling for low interest rates over the long haul, even as presidents of other regional Federal Reserve banks express their uneasiness with the central bank's asset-purchasing program, now known as quantitative easing.

Low interest rates are supposed to stimulate borrowing, spending and economic growth, and the Fed has been trying to push down rates by buying long-term securities from banks since the end of 2008. It hasn't sped up the recovery, but it also hasn't caused inflation, according to the personal consumption expenditure price index the Fed uses to measure inflation.

Kocherlakota said Tuesday that new data could always cause him to shift his position, but he sees rising inflation as unlikely over the next three years. Even if inflation did start to rise, the Fed could drive up interest rates to combat it, he said.

He has come full circle on the question of Fed monetary policy in the past year. He argued in 2010 and 2011 that low interest rates could do little to cure high unemployment because the joblessness appeared to be structural -- that is, caused by fundamental changes in the economy that kept people out of work because their skills or geography didn't match available jobs.

A wave of analysis in 2012 arguing that unemployment was not structural helped change Kocherlakota's mind and, in the summer and fall, he started calling for the Fed to keep interest rates extraordinarily low either until unemployment hit 5.5 percent or inflation started to rise above 2 percent.


Distributed by MCT Information Services

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Source: , Star Tribune (Minneapolis)

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