| GOLDEN VALLEY, Minn./PROVIDENCE, R.I.
GOLDEN VALLEY, Minn./PROVIDENCE, R.I., Jan 15 (Reuters) -
T wo dovish Federal Reserve officials pushed back against some of
their more hawkish peers on Tuesday, arguing that the U.S.
central bank's accommodative policies are appropriate and may
even need to be eased further.
In a speech that stamped him as perhaps the most dovish of
the central bank's 19 policymakers, Minneapolis Federal Reserve
President Narayana Kocherlakota said the Fed "should provide
more monetary accommodation" by targeting a 5.5 percent
Just last month, the Fed vowed to keep interest rates near
zero until the unemployment rate falls to 6.5 percent from 7.8
percent currently, as long as inflation expectations remain
below 2.5 percent.
But Kocherlakota wants to go even further.
Based on his predictions for both inflation and
unemployment, Kocherlakota said: "It would be appropriate ... to
increase the level of monetary accommodation by lowering the
unemployment rate threshold to 5.5 percent."
Setting a lower threshold for the central bank to even
consider raising interest rates would boost demand, inflation
and employment, he told the Financial Planning Association of
Inflation is currently about 1.5 percent, according to the
Fed's preferred measure, below a 2 percent target. U.S. GDP grew
at a decent 3.1 percent in the third quarter, the fastest pace
since late 2011, though it is expected to have slowed in the
last three months of the year.
In Rhode Island, Boston Fed President Eric Rosengren brushed
aside concerns that some Fed officials have recently expressed
over inflation, making it clear that he will support the central
bank's efforts this year to relieve U.S. joblessness.
In a textbook argument for a continuation of current
monetary policy, he said such a stance should raise inflation
and lower unemployment toward their stated goals.
"Continued monetary accommodation is absolutely appropriate
and indeed needed as long as we are projected to miss on both
elements of the Fed's dual mandate, inflation and employment,"
Rosengren told the Greater Providence Chamber of Commerce.
Rosengren - who unlike Kocherlakota has a vote on Fed policy
this year - said he doesn't expect to reverse the central bank's
accommodative policy stance "for most of this year."
He added that the Fed's unprecedented efforts have already
encouraged Americans to buy homes and cars and other goods that
help spur economic growth, for which he predicted an
The Federal Open Market Committee, the group of Fed
officials who set U.S. monetary policy, next meets on Jan.
HAWKS RAISE RED FLAGS
The federal funds rate has been near zero since late 2008,
which was the nadir of the financial crisis that stunned the
U.S. economy and sparked a deep global recession.
Last month's interest-rate pledge comes even as the Fed buys
$85 billion in longer-term assets per month - effectively a
two-front effort by the central bank to spur investment and
growth three and a half years after the end of the Great
More hawkish Fed officials, however, argue that year after
year of low rates and the use of unconventional - and untested -
policies such as the asset purchases set the stage for a run-up
in inflation and could disrupt financial markets.
Kansas City Fed President Esther George and James Bullard of
St. Louis - both of whom have a vote on policy this year -
expressed such reservations last week.
Minutes from the central bank's December meeting show deep
divisions between those policymakers who want to slow or stop
the bond buying this year, and those who want it to last longer.
Still the majority of top Fed officials, including Chairman
Ben Bernanke, have tended toward the dovish end of the policy
spectrum that is willing to do what it takes to repair the
still-bruised U.S. labor market.
Last month's unprecedented step of tying low interest rates
to specific levels of unemployment and inflation was in part
meant to stress the Fed's commitment to getting Americans back
In calling for still more policy easing just one month
later, Kocherlakota's speech set him apart from even Chicago Fed
President Charles Evans, the central bank's first and most vocal
advocate for more easing using a threshold-based policy.
While Evans and Rosengren have signaled they are comfortable
with current policy, Kocherlakota predicted that, under current
conditions, unemployment will not fall below 7 percent for at
least two years.
Inflation, he forecast, will be 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, Kocherlakota
Rosengren predicted economic growth would again pick up in
the first half of this year, and rise to closer to 3 percent in
the second half - assuming U.S. lawmakers do not disrupt the
economy as they decide on tax and spending policies, he said.