Fed leader calls for more stimulus

  • Article by: ADAM BELZ , Star Tribune
  • Updated: September 5, 2013 - 8:16 PM

Narayana Kocherlakota of the Minneapolis Fed said interest rates should stay very low as long as current conditions persist.

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Narayana Kocherlakota

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As the Federal Reserve contemplates the end of its massive bond-buying program, the chief of its Minneapolis branch said Thursday that the central bank “should be providing more stimulus to the economy, not less.”

Minneapolis Fed President Narayana Kocherlakota said that with the unemployment rate falling only gradually and inflation not rising, by its own forecasts the Fed is “failing to provide sufficient stimulus to the economy.”

“The U.S. economy is recovering from the largest adverse shock in 80 years,” the former University of Minnesota economics professor said. “A historically unprecedented shock should lead to a historically unprecedented monetary policy response.”

The Fed is buying $85 billion a month in mortgage-backed securities and Treasury notes to drive down long-term interest rates, including for mortgages. The plan was to goose the economy, but the bond-buying was never meant to be permanent.

In May, as the economy showed signs of sustained improvement, Fed Chairman Ben Bernanke hinted that the end of the bond buying may be near.

Mortgage rates and Treasury yields rose quickly as bond markets prepared to lose a very large customer. After a summer of speculation, Bloomberg surveyed economists and reported that 65 percent of them believed the Fed would start to taper the bond-buying program at its next Federal Open Market Committee meeting, on Sept. 17-18.

If that’s the consensus, Kocherlakota’s Wednesday speech at the University of Wisconsin-La Crosse was a note of dissent.

Kocherlakota has said repeatedly that he thinks interest rates should stay extraordinarily low at least until joblessness falls below 5.5 percent — or inflation rises above 2.25 percent.

But U.S. unemployment is still at 7.4 percent, well above the Fed’s target of 6.5 percent. Annual inflation, which theoretically should rise when interest rates are low, remains well below 2 percent.

But Kocherlakota is not a voting member of the Fed’s policy-setting Open Market Committee this year, and early in the summer Bernanke gave investors the impression the Fed could soon start scaling back the bond-buying program, known as quantitative easing.

Fed deliberations were dissected for weeks, and though the furor subsided some in August, attention is turning back to the central bank as the next committee meeting looms.

San Francisco Fed President John Williams said earlier this week he favors slowing bond buying this year. Other Fed officials hold different positions.

Mortgage rates are more than a percentage point higher (4.57 percent on a 30-year loan) than they were in May as the bond market adjusted to the possibility of losing one of its largest customers. Yields on 10-year Treasury notes have responded, too, rising 1.24 percent to 2.88 percent since May.

The end of Fed bond buying will ultimately be a sign of progress, evidence that the economy is picking up momentum. Fed officials have said since May that they could start to scale back the program if the economy starts to improve quickly enough.

Among the indicators that will be watched closely is Friday’s jobs report, which is expected to show the economy added about 173,000 jobs.

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