March 4, 2013 / 5:31 PM / 5 years ago

Kocherlakota: Fed should keep rates low until 'full employment'

March 4 (Reuters) - The U.S. Federal Reserve need not raise interest rates before the economy reaches full employment, according to remarks from a top Fed official released on Monday.

“I think there’s this vision out there...that somehow we have to raise rates before we get to full employment,” Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, said in comments made on Dec. 19 and posted to the regional bank’s website on Monday.

“If you say you’re always going to be raising rates before you get to full employment, you’re defeating yourself. You’re tying your hands behind your back,” said Kocherlakota, who made his remarks in a December interview conducted by the Minneapolis Fed.

A week before Kocherlakota’s remarks, the Fed had promised to keep rates low until unemployment drops at least to 6.5 percent as long as inflation stays under control. Kocherlakota had advocated the Fed set its unemployment threshold at 5.5 percent to increase stimulus to an economy weighed down by too-high unemployment.

Full employment is the lowest level of unemployment the economy can handle before upward wage pressures arise.

Eventually, Kocherlakota suggested, the Fed may need to lower its unemployment threshold closer to a level consistent with full employment. Fed officials see that as between 5.2 percent and 6 percent.

“(L)owering it is perfectly in keeping with what we’ve said so far,” he said. “I worry that we’ll come to a point where we’re going to want to do this later anyway — that is, lower the unemployment threshold — and we’ll have lost all the stimulus we could have provided in the intervening period by lowering it ahead of time.”

“I think, under current conditions, we have a lot of room to influence economic activity without generating inflation that’s noticeably above 2 percent,” Kocherlakota said.

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