The president of the Minneapolis Fed said Thursday that the job market remains in bad enough shape that the Federal Reserve should not pull back its efforts to stimulate the economy, and instead should do more.
In a speech to the Rotary Club in Houghton, Mich., local Fed leader Narayana Kocherlakota said that instead of scaling back its massive bond-buying program, the Fed should set the goal of a "fast return to maximal employment."
He said the Fed should do "whatever it takes" to reach that goal, even as the economy starts growing faster.
"The weak labor market represents considerable hardship for a large number of Americans, both in economic terms and in psychological terms," Kocherlakota said. "It represents a significant waste of resources for the national economy, because our country is failing to use a large fraction of our human potential."
The Fed is already buying $85 billion in bonds each month to drive down interest rates and boost economic growth, a program known as quantitative easing. Fed officials surprised Wall Street earlier this month by deciding to continue the program, which some Fed members believe should be scaled back, or "tapered."
A week after the Fed's decision, Kocherlakota reiterated his stance that unless inflation begins to rise — which it has not done — the Fed should be more aggressive about combating unemployment.
His call for the Fed to set a goal of rapidly driving down unemployment was new, but he has been advocating for several months against tapering the program.
Kocherlakota, who took over the Minneapolis Fed in 2009, has not been a voting member of the Federal Open Market Committee (FOMC) this year, but he will be able to vote in 2014. He has become one of the most vocal proponents of the Federal Reserve's doing more to stimulate the economy, after being considered an interest rate hawk in 2011.
Invoking the words of Paul Volcker, who was Fed chairman from 1979 to 1987, Kocherlakota said American monetary policymakers face "a time of testing."
While the test in Volcker's day was high inflation, the test for the Fed today is high unemployment.
"In 1979, the FOMC was faced with what proved to be a very painful trade-off between keeping inflation low and keeping employment high," he said. "In 2013, there is no such trade-off. … The impact of the Great Recession has left both prices and employment too low."
At 7.3 percent, the U.S. jobless rate is still too high and probably understates the problem, Kocherlakota said, since the employment-to-population rate is still well below what it had been any time between 1986 and 2007.
"The good news is that, with low inflation," Kocherlakota said, "the FOMC has considerable monetary policy capacity at its disposal with which to address this problem."