Fed has not lowered interest rates enough: Kocherlakota

CHICAGO Fri May 17, 2013 3:25pm EDT

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

CHICAGO (Reuters) - The Federal Reserve has not done enough to lower U.S. borrowing costs to boost economic growth, a top Fed official said on Friday, citing his outlook for overly low inflation and overly high unemployment over the next two to three years.

Since the Great Recession, workers and businesses are seeking safer assets, even as the supply of assets perceived as safe dwindles, Minneapolis Fed President Narayana Kocherlakota told a group convened by the University of Chicago Booth School of Business.

"The increase in asset demand, combined with the fall in asset supply, implies that households and firms spend less at any level of the real interest rate — that is, the interest rate net of anticipated inflation," he said.

The Fed has kept short-term interest rates near zero since December 2008, and has bought well over $2 trillion in Treasuries and housing-backed bonds to bring down long-term interest rates and stimulate spending and hiring.

"The (Fed) has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I've described," Kocherlakota added.

Kocherlakota is arguably the most dovish of the Fed's 19 policymakers since his sudden conversion last October, when he called for the central bank to pledge low interest rates until unemployment falls to at least 5.5 percent, a full percentage point lower than the threshold the Fed adopted late last year.

He reiterated that proposal in Friday's remarks, saying that the Fed's failure to say what it plans for rate policy once the jobless rate hits 6.5 percent is a "hole" in its evolving communications.

A second hole, he said, is the Fed's "vagueness" about how long it will continue to buy assets, currently at a pace of $85 billion a month. Clarity on what constitutes a substantial improvement in the labor market outlook - the Fed's stated milestone before it ends its bond-buying program - would make Fed policy more effective, he said.

Kocherlakota also pushed back hard against those, including some of his colleagues at the Fed, who warn that prolonged low interest rates lead to disruption of the financial system.

Low rates do lead to more volatility in asset prices, he said. But tighter monetary policy should only be used to rein in risks to financial stability if the benefits are clear.

And they are anything but, he argued.

"The gains from tightening related to improving financial stability are both speculative and slight," he said. "In contrast, the losses from tightening, in terms of pushing employment and prices even further below the Federal Reserve's goals, are both tangible and significant."

Unemployment, at 7.5 percent, is far above the 5.5 percent Kocherlakota says is normal.

Inflation by the Fed's favored gauge is running well below the U.S. central bank's target of 2 percent.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama and Jan Paschal)

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Comments (1)
minipaws wrote:
So, you think I will really deposit my money in a bank if I have to pay interest on my savings. Wow. Unbelieveable.

May 20, 2013 6:36am EDT  --  Report as abuse
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