ISTANBUL (Reuters) - The Federal Reserve may need to let inflation run a little higher than its 2-percent target in order to bring down unemployment faster, a top Fed official said on Saturday.
Strictly capping inflation at 2 percent while allowing high unemployment to linger would be an “inappropriate” approach to monetary policy, Minneapolis Federal Reserve Bank President Narayana Kocherlakota suggested in slides prepared for presentation at the Istanbul Center for Economic Research.
Instead, a balanced approach to policy could mean letting inflation run slightly hot for several quarters in order to speed the economy’s path toward full employment, the slides suggested.
Kocherlakota’s prepared slides contained little commentary beyond quotations of stated Fed policy, and offered little insight into the most pressing question of the day for Fed policy watchers: whether and when the U.S. central bank will ease up on the monetary gas pedal by reducing its bond-buying program, now at a massive $85 billion a month.
But graphs plotting inflation and unemployment under “balanced” and “inappropriate” scenarios did suggest that Kocherlakota has no appetite for policies that would allow unemployment to stay high for many years.
Kocherlakota has been virtually alone among top Fed officials in urging his colleagues to ease monetary policy even further to bring down unemployment faster.
In a presentation earlier in the day, Kocherlakota laid out a theoretical case under which too-tight monetary policy can result in overly high real interest rates and a decline in economic activity.
The slides provided in advance of that talk did not address Kocherlakota’s views on the appropriateness of current Fed policy.
Against the backdrop of U.S. inflation that is currently well below the Fed’s 2-percent target, a monetary policy that requires a trade-off between inflation and employment seems largely theoretical.
Indeed, Kocherlakota noted on Saturday, the very same policies that help bring the economy closer to full employment typically will also help bring inflation closer to the Fed’s target.
The Fed’s current bond-buying program, aimed at lowering long-term U.S. borrowing costs and boosting growth and hiring, is also expected to boost inflation.
But sometimes, Kocherlakota said, the Fed’s two goals can come into conflict, and the central bank must balance them against each other.
That can lead to a policy that allows inflation to rise above the Fed’s target temporarily, in order to bring down unemployment faster than otherwise, he said.
The Fed’s preferred gauge of inflation rose just 1.1 percent in the past 12 months, data on Friday showed. The Fed watches this index closely to predict the future course of inflation.
Writing by Ann Saphir; Editing by Diane Craft