WASHINGTON, March 21 (Reuters) - 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 dropping the Fed’s pledge to keep rates low until the jobless rate reaches a more healthy level, the U.S. central bank 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 raising rates.
Rates have been kept 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.
With unemployment now at 6.7 percent, Yellen said the Fed needed to provide a better sense of what would drive interest rate policy, beyond a single labor market statistic.
The new rate guidance “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 employment. (Reporting by Ann Saphir; Editing by Chizu Nomiyama)