CHICAGO May 17 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 in prepared remarks.
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.
Still, Kocherlakota said, "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 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.
While he did not repeat that proposal in Friday's remarks, Kocherlakota did push back against those, including some of his colleagues at the Fed, who have warned that prolonged low interest rates lead to financial system disruption.
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."
Kocherlakota is to participate in a panel discussion Friday afternoon with Sveriges Riksbank Governor Stefan Ingves on the future of financial regulation and monetary policy.