Fed's Kocherlakota: Don't raise rates to head off possible crisis

WASHINGTON Fri Mar 21, 2014 4:30pm 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

WASHINGTON (Reuters) - Raising interest rates to head off a potential financial crisis is simply not worth it, a top Federal Reserve official said on Friday.

With economists forecasting very low odds of a crisis anyway, there is "little benefit to reducing or eliminating the probability of a crisis" with tighter monetary policy, Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, said in slides prepared for presentation to a conference in Washington.

If a crisis were to occur, unemployment would probably rise sharply, he said. But battling such an unlikely event by raising rates -- which would almost surely increase unemployment -- is a losing tradeoff, his reasoning suggests.

Fed officials and economists are increasingly concerned that keeping rates low for as long as the Fed has - since December 2008 - and buying trillions of dollars of bonds on top of that to push down borrowing costs could fuel unseen bubbles in the economy.

Some policymakers have even advocated using monetary policy to head off bubbles, although that does not appear to be the dominant view at the Fed.

Echoing a more broadly accepted approach, Kocherlakota said that supervisory tools are the best way to fight the risk of financial instability posed by low rates.

In his prepared slides, Kocherlakota did not mention his dissenting vote at the Fed this week, which marks him as one of the central bank's most dovish policymakers.

(Reporting by Ann Saphir; Editing by Leslie Adler)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (15)
Mainspring44 wrote:
Mister Kocherlakota should thank his lucky stars that Lawrence Summers did not get the chairmanship. A lone voice grandstanding his own special stance on policy would not go unnoticed by the blunt Mr. Summers. We shall see how well Mr. Kocherlakota persuades his colleagues now that he’s acted on impulse.

Mimicking the obstreperous pols of Congress seems unlikely to promote his standing – or his criticisms.

Mar 21, 2014 10:07am EDT  --  Report as abuse
Dr_Steve wrote:
Well, we’re off to a booming start under Janet. Hang onto your seat.

Mar 21, 2014 10:51am EDT  --  Report as abuse
Obsilutely wrote:
Next we’ll hear they are trying to “Pray the rate away”…

Mar 21, 2014 11:26am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

How to get out of debt

Financial adviser Eric Brotman offers strategies for cutting debt from student loans and elder care -- and how to avoid money woes in the first place.  Video 

Recommended Newsletters

Reuters U.S. Top News
A quick-fix on the day's news published with Reuters videos and award-winning news photography and delivered at your choice of one of four times during the day.
Reuters Deals Today
The latest Reuters articles on M&A, IPOs, private equity, hedge funds and regulatory updates delivered to your inbox each day.
Reuters Technology Report
Your daily briefing on the latest tech developments from around the world from Reuters expert tech correspondents.