Fed's Kocherlakota: lowering interest rates is not a panacea

MINNEAPOLIS Wed Jan 16, 2013 9:25pm EST

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MINNEAPOLIS Jan 16 (Reuters) - Lowering interest rates helps boost the economy and bring down unemployment, a top Federal Reserve official said on Wednesday, echoing exactly the phrasing of Fed Chairman Ben Bernanke on the effectiveness of monetary policy, but advocating a different way of getting there.

"Is it a panacea, will it cure all ills in the economy? Absolutely not," Minneapolis Federal Reserve Bank President Narayana Kocherlakota said after a speech in which he called for the Fed to ease policy further. "But given the goals that have been set for us by Congress, it's incumbent to move in the direction that we're supposed to move, and the policy path, the change that I've described, I think would be helpful."

Bernanke has often stressed that while easy monetary policy is not a cure-all, it can help a damaged economy. Last month he led the Fed in a decision to ramp up asset purchases aimed at speeding recovery and boosting employment, and to pledge to keep rates low at least until the unemployment rate falls to 6.5 percent, as long as inflation remains muted.

Kocherlakota this week mounted a public campaign for the Fed to ease policy even further, not by buying more assets, but by extending its pledge to keep rates low.

At three Minneapolis-area venues over two days, he has argued that using a 5.5 percent threshold for any possible interest-rate increase would put the economy back on track more quickly than the Fed's 6.5-percent threshold, with little risk of sparking unwanted inflation.

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