What are the forces moving the Minnesota economy? Adam Belz tries to identify the trends and show the connections between Minnesota and the larger U.S. and global economies. You can connect with him on Twitter: @adambelz

Minneapolis Fed chief repeats call for easier monetary policy

Posted by: Adam Belz under Economics Updated: March 27, 2013 - 12:35 PM

The president of the Federal Reserve Bank of Minneapolis said Wednesday the economy is not growing fast enough, inflation is not a near-term risk, and the Fed should do more to stimulate the economy.

Narayana Kocherlakota repeated his call for the central bank to keep interest rates low until national unemployment falls below 5.5 percent, a full percentage point lower than the current threshold set by the Federal Reserve.

Speaking to a group of metro area chambers of commerce at the Edina Country Club, Kocherlakota said he expects inflation to rise only slowly, and unemployment to be near 7 percent through 2014.

"My outlook for the next two years can be summarized as being an ongoing modest recovery," he said. "I expect unemployment to continue to fall only slowly, down to around 7.5 percent in late 2013 and around 7 percent in late 2014."

In order to speed up the recovery and help heal the country's job market, Kocherlakota believes the Federal Open Market Committee should lower its threshold unemployment rate -- the rate that would make the Fed start raising interest rates -- from 6.5 percent to 5.5 percent.

While not currently a voting member of the Federal Open Market Committee, Kocherlakota participates in its meetings. Once considered an interest rate hawk, Kocherlakota was convinced in 2012 that inflation is not an imminent threat. Since then he's become a vocal proponent of easier monetary policy.

He's been saying the same thing since September, when he joined Chicago Fed President Charles Evans in calling for the Fed to keep interest rates low until the national jobless rate falls to a certain level. Kocherlakota said that level should be 5.5 percent.

The Federal Open Market Committee said in December that it would continue to hold down rates either until unemployment falls below 6.5 percent or the inflation outlook rises above 2.5 percent.

Kocherlakota spoke Wednesday to the chambers of commerce from Bloomington, Eden Prairie, Edina and Richfield. He said the lower threshold would increase the demand for goods and push upward on both employment and prices, because the public would rightly believe that rates will stay low for longer.

Inflation risk is distant for now, he said, with the the prices of all goods and services rising an average of 1.6 percent per year for the past five years.

"I do see inflation eventually returning to that 2 percent target under the FOMC's current forward guidance," he said. "But I expect a slow rate of progress."

Not everyone at the Fed agrees with Kocherlakota. Federal Reserve Bank presidents in Virginia, St. Louis and Kansas City have signaled they are not comfortable with the Fed's ongoing policy, which means the Fed buys roughly $85 billion in mostly government-backed assets each month to keep interest rates low.

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