* Kocherlakota repeats proposal for 5.5 percent jobless
* Says new guidance suggests Fed is comfortable with
excessively low inflation
(Adds details, background)
By Ann Saphir
WASHINGTON, March 21 The Federal Reserve should
have promised to keep rates near zero until U.S. unemployment
falls below 5.5 percent, as long as inflation and financial
stability risks are contained, said the lone dissenter to the
Fed's policy decision this week.
By instead dropping its pledge to keep rates low until the
jobless rate reaches a more healthy level, the Fed is sending
the wrong message on both inflation and jobs, Minneapolis
Federal Reserve Bank President Narayana Kocherlakota said in
remarks released on Friday.
On Wednesday the Fed, in its first policy-setting meeting
under Fed Chair Janet Yellen, said it would factor in a wide
range of economic measures as it judged the correct timing for
The U.S. central bank has kept rates near zero since
December 2008, and the Fed had since December 2012 promised to
keep them there until the unemployment rate fell to at least 6.5
percent, as long as inflation did not threaten to rise above 2.5
With unemployment now at 6.7 percent, and the Fed's
preferred gauge of inflation little more than half of its
2-percent target, policymakers decided to jettison what many
said were becoming increasingly irrelevant guidelines.
But to Kocherlakota, one of the Fed's most dovish
policymakers, dropping any reference to those thresholds "does
not communicate purposeful steps being taken to facilitate a
more rapid increase of inflation back to the 2 percent target,"
Kocherlakota said, and suggests "the committee views
persistently sub-2-percent inflation as an acceptable outcome."
It also creates uncertainty over economic growth prospects,
he said, by giving little information about how fast the Fed
wants the economy to return to full employment, and even about
the level of unemployment it views as being consistent with full
Kocherlakota has been pressing for the Fed to promise low
rates until unemployment reaches the more normal level of 5.5
percent even before the Fed adopted the 6.5 percent unemployment
threshold for considering any rate rise.
The promise, he said, should be contingent on inflation
rising no more than a quarter of a percentage point above the
Fed's 2-percent target, a stipulation he repeated on Friday.
New in his proposal was a caveat that low rates would also
be contingent on possible risks to financial stability remaining
contained, a nod to the concern that some Fed officials have
over the potential for sustained near-zero rates to foster
Kocherlakota said he agreed with one aspect of the Fed's new
policy: its stated intent to keep rates below normal levels for
some time even after inflation and the labor market return to
more normal levels.
(Reporting by Ann Saphir; Editing by Chizu Nomiyama)