Fed should ease policy further: Kocherlakota

GOLDEN VALLEY, Minnesota Tue Jan 15, 2013 8:54am EST

Minneapolis Federal Reserve Bank President Narayana Kocherlakota speaks at a macro-finance conference hosted by the Boston Federal Reserve Bank and Boston University in Boston, Massachusetts November 30, 2012. REUTERS/Brian Snyder

Minneapolis Federal Reserve Bank President Narayana Kocherlakota speaks at a macro-finance conference hosted by the Boston Federal Reserve Bank and Boston University in Boston, Massachusetts November 30, 2012.

Credit: Reuters/Brian Snyder

GOLDEN VALLEY, Minnesota (Reuters) - The U.S. central bank should move to put the nation on a faster track toward more desirable levels of inflation and employment by easing monetary policy further, a top Federal Reserve official said on Tuesday.

The Fed, which just last month vowed to keep rates near zero until the unemployment rate reaches 6.5 percent, should extend that pledge until the jobless rate hits 5.5 percent, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said in remarks prepared for delivery to the Financial Planning Association of Minnesota.

Setting a lower threshold for the Fed to even consider raising interest rates would boost demand and push upward on both inflation and employment, he argued. The Federal Open Market Committee, the group of Fed officials who set U.S. monetary policy, next meets on January 29-30.

"My outlook for both inflation and unemployment means that the FOMC should provide more monetary accommodation," Kocherlakota said. "It would be appropriate for the committee to increase the level of monetary accommodation by lowering the unemployment rate threshold to 5.5 percent."

Absent such additional stimulus, unemployment, now at 7.8 percent, will not fall below 7 percent for at least two years, he forecast, and inflation will be below the Fed's 2-percent goal at 1.6 percent this year and 1.9 percent next year. The economy overall will grow about 2.5 percent this year, and 3 percent in 2014, he predicted.

In calling for still more policy easing just one month after the Fed took the unprecedented step of tying its low-rate policy to a specific level of unemployment, Kocherlakota's speech marks him as perhaps the Fed's most dovish policymaker.

Even Chicago Fed President Charles Evans, the central bank's first and most vocal advocate for more easing using a threshold-based policy, has signaled he is comfortable with current policy, which also includes a bond-buying program of $85 billion a month aimed at lowering borrowing costs and boosting growth.

On the other end of the policy spectrum, Kansas City Fed President Esther George has criticized the Fed's recent moves, saying they could lay the groundwork for unwanted inflation. But Kocherlakota, who next votes on the Fed's policy-setting panel in 2014, argued that keeping rates low until unemployment falls to 5.5 percent is unlikely to push inflation very high at all.

As proof, he said, one need look no farther than the Fed's own forecasts for long-run unemployment, which show that Fed officials see an unemployment rate of 5.2 percent to 6 percent as consistent with 2-percent inflation.

"These estimates suggest that, as long as the unemployment rate remains above 5.5 percent, wage pressures will not be sufficiently strong to generate a medium-term inflation outlook much in excess of 2 percent," he said.

Because the Fed has already said it will abandon its low-rate policy if inflation threatens to rise above 2.5 percent, "even if I am wrong in my assessment, the committee's forward guidance provides tight inflation safeguards," he said.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

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