(Recasts; adds comments, background)
By Ann Saphir
ROCHESTER, Minn., April 8 The Federal Reserve
should do more to boost both inflation and jobs, a top Fed
official said on Tuesday, including possibly pushing its main
interest rate even lower or cutting the rate it pays banks on
excess reserves kept at the U.S. central bank.
"The key is for us to be able to demonstrate in an effective
fashion that we are committed to the recovery," Narayana
Kocherlakota, president of the Minneapolis Federal Reserve Bank,
told reporters after a speech.
The Fed has been winding down its massive bond-buying
stimulus since early this year, and Kocherlakota said he has no
plans to "relitigate" that decision, which puts the Fed on track
to ending bond-buying altogether before the end of the year.
Instead, he said on Tuesday, the Fed must do better on
returning the economy more rapidly to full employment and a
healthy 2-percent pace of inflation.
The Fed has kept its short-term policy rate between zero and
a quarter of a percentage point since December 2008, and
Kocherlakota told the Greater Rochester Chamber of Commerce that
"we should be thinking about" pushing it even lower.
"It's really about demonstrating a commitment to stay with
the recovery for as long as it takes to get the economy fully
recovered," he said.
The idea of lowering the Fed's main policy rate, already
near zero, or cutting the rate the Fed pays to banks on reserves
they keep locked up at the central bank, is outside the
mainstream of current Fed policymaking, which currently is
focused on providing guidance about what economic conditions
could lead to the Fed raising rates.
Kocherlakota, whose lone dissent against the Fed's policy
decision last month marks him as the central bank's most dovish
member, said that guidance falls short.
"We would be better off having more of a collective vision
as a committee to what the change in conditions would have to be
that would lead us from ending the asset purchase program to
raising rates," he told reporters.
"Unless we communicate as a group about what those
conditions are, then we face this instability that two words in
a press conference, or two words in a speech or an answer to a
Senator can end up moving financial markets participants' vision
of what we are trying to do with policy."
The Fed last month said it would reduce its monthly bond
purchases to $55 billion and would continue to trim the program
in measured steps as long as the economy improves as it expects.
After the policy-setting meeting, Fed Chair Janet Yellen
briefly roiled markets when she suggested the Fed may start
raising rates around "six months" after the bond-buying program
ends. She also said that the timing of any rate hike depends on
economic conditions, but that message was lost in the immediate
aftermath of her answer.
"Unless we communicate more effectively on a collective
basis about how conditions are shaping our policy choices, I
think we going to continue to face that kind of instability,"
In recent weeks several Fed policymakers have given their
views as to when rates ought to start rising, although forecasts
from all 16 current policymakers show nearly all expect it
sometime next year.
Kocherlakota on Tuesday refused to be drawn about his
personal expectations for when rates should rise.
He reiterated his expectation that the U.S. economy will
likely grow around 3 percent this year and that unemployment
will fall to the "low sixes" by the end of this year, from 6.7
"It's a question of the speed of the recovery, not about
whether we are seeing a recovery," he said.
Inflation, which is running near 1 percent, is "too low" and
does not look likely to rise back to the Fed's 2 percent goal
for another four years, Kocherlakota said.
"Low inflation in the United States tells us that resources
are being wasted," he said, including the productive potential
of Americans who cannot get jobs because demand for goods and
services is so low.
And while unemployment has fallen from the recession-era
high of 10 percent, "the U.S. labor market is far from healthy,"
he said. Longer term, he said, unemployment should fall to just
over 5 percent.
Kocherlakota's view that the Fed should do more is no
secret: The Fed, in his view, 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.
Instead, the Fed last month dropped the idea of tying low
rates to any specific unemployment figure and said it would
factor in a wide range of economic measures as it judged the
correct timing for raising rates.
Kocherlakota said that the Fed could reword its policy
statement show "a stronger commitment to the recovery in terms
of being willing to stay accommodative for as long as it takes
to see the recovery to completion."
(Reporting by Ann Saphir; Editing by Leslie Adler and James