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 says job market still too weak, calls for more stimulus

Posted by: Adam Belz under Business trends, Economics Updated: November 12, 2013 - 4:24 PM

The president of the Minneapolis Fed on Tuesday repeated his call for the Federal Reserve to keep up efforts to stimulate the sluggish economy, rather than scale back its massive bond-buying program.

With fresh ammunition from a new study suggesting that the Fed could drive down unemployment faster if it promised to keep interest rates low for longer, Narayana Kocherlakota called “puzzling” the public conversation about when the Fed will taper its bond-buying program, known as quantitative easing.

Unemployment is too high and understates the weakness of the job market, he said, and inflation is not in danger of rising.

“Inflation rates are very low by historical standards, relative to the goal of 2 percent a year, so there’s no reason to be afraid of monetary stimulus,” said Narayana Kocherlakota at a St. Paul Chamber of Commerce lunch, when asked what the takeaway should be from his half-hour speech.

Kocherlakota, who took over the Minneapolis Fed in 2009, has not been a voting member of the Fed’s monetary policy-setting 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.

At 7.3 percent, the U.S. jobless rate is still too high and doesn’t account for workers who’ve given up the job search, he said. The nation’s employment-to-population ratio, which helps to capture this shrinkage of the labor force, is historically low. While it’s true that the ratio is falling in part because of the retirement of baby boomers, that demographic force is too small to account for the historic decline, Kocherlakota said. For people ages 25 to 54, the ratio is 75.4 percent, a little higher than it was during the recession, but before that the lowest it’s been since 1984.

“The weak labor market represents considerable hardship for a large number of Americans, both in economic terms and in psychological terms,” Kocherlakota said.

Meanwhile, inflation has been dropping since the beginning of 2012 and is well below the Fed’s target inflation rate of 2 percent.

Kocherlakota has called for the Fed to keep interest rates extraordinarily low at least until the U.S. unemployment rate falls below 5.5 percent, so long as the two-year outlook for inflation stays below 2.5 percent. He repeated that call Tuesday, which differs from the FOMC’s consensus that interest rates should stay low until unemployment falls below 6.5 percent.

While he has been among the most dovish voices at the Fed for more than a year, Kocherlakota’s position was bolstered by a study published by William English, director of monetary affairs for the Federal Reserve Board of Governors, earlier this month. (The study was covered in the Wall Street Journal here.)

The study’s models show that “reducing the unemployment threshold improves measured economic performance until the unemployment threshold reaches 5.5 percent.”

Kocherlakota said that considering the Fed’s outlook for a gradual reduction in unemployment and for inflation to stay below 2 percent over the medium term, the central bank should tell Wall Street and the public that it will keep interest rates low at least until the 5.5 percent unemployment rate threshold is met.

It could also, he said, lower the interest rate being paid to banks on their excess reserves, which would incentivize them to lend that money to businesses and consumers instead of holding onto it.

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