April 2, 2013 / 5:21 PM / 6 years ago

Fed's Kocherlakota repeats call for more policy easing

(Reuters) - Minneapolis Federal Reserve Bank President Narayana Kocherlakota on Tuesday repeated his call for more monetary policy easing, urging the central bank to leave interest rates near zero until the unemployment rate falls to 5.5 percent.

Minneapolis Federal Reserve Bank President Narayana Kocherlakota speaks at a macro-finance conference hosted by the Boston Federal Reserve Bank and Boston University in Boston, Massachusetts November 30, 2012. REUTERS/Brian Snyder

Doing so would give the economy a bigger boost than the Fed’s current promise to keep rates low until unemployment falls to 6.5 percent, he argued in remarks prepared for delivery to the Grand Forks/East Grand Forks Chamber of Commerce in Grand Forks, North Dakota.

His prepared remarks were virtually identical to those he delivered last week in Edina, Minnesota, and echo the thrust of an argument he first made last October.

“(M)y outlook implies that monetary policy is currently not accommodative enough,” Kocherlakota said, forecasting unemployment, now at 7.7 percent, to fall only slowly to 7 percent by the end of 2014, and for inflation to continue to lag below the Fed’s 2-percent target. “Monetary policy should be more accommodative.”

Kocherlakota, who this year does not have a vote on the Fed’s policy-setting committee, is the only top Fed official to publicly call for more policy accommodation this year.

The U.S. central bank in September redoubled efforts to boost the jobs market by launching a new asset-purchase program aimed at pushing down long-term rates and promising to keep buying assets until the labor market outlook improves substantially.

In December it tied its low-rate policy explicitly to progress on the jobs front, vowing to keep rates low until unemployment falls to 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.

Fed policymakers have said that both the low-rate vow and the asset-purchase program have begun to help the recovery gain some traction.

Indeed, the economic outlook has strengthened in recent months, and policy centrist Cleveland Fed President Sandra Pianalto has joined some of the Fed’s more hawkish policymakers in suggesting the Fed begin to think about cutting back on its asset purchases.

Fed Chairman Ben Bernanke and his closest allies at the U.S. central bank have pushed back, strongly defending the Fed’s continued accommodative policies.

But only Kocherlakota has continued to call for the Fed to do even more.

The Fed, which is now buying a monthly $85 billion in Treasuries and mortgage-backed securities, could deliver a bigger boost to the economy by more precisely identifying the conditions that would prompt it to pare or end its bond-buying program, Kocherlakota said.

It could also make it clear that once it starts to remove monetary accommodation, it would do so more slowly than investors currently expect, he said.

While both of those approaches could deliver more policy easing, Kocherlakota said, they would require complex changes to the way the Fed communicates its intentions.

By contrast, vowing low rates until unemployment reaches the more normal level of 5.5 percent would require changing only one number in the Fed’s statement, he said.

Although Kocherlakota’s push for easier monetary policy has many critics calling him an employment-focused dove, the Minneapolis Fed chief was careful to show he is still tough on inflation.

A Fed commitment to low rates until unemployment falls to 5.5 percent would be unlikely to boost inflation beyond 2.25 percent, he said, citing the historical record of inflation and the lack of upward wage pressures.

But should inflation threaten to rise above 2.5 percent, he said, the Fed should “strongly consider an aggressive response.”

Writing by Ann Saphir in San Francisco; Editing by Chizu Nomiyama

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