The country could be facing a protracted battle with elevated unemployment, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said Thursday.
Kocherlakota used Sweden to highlight the possibility that the U.S. labor market could possibly be experiencing a historic shift coming out of the financial shock and Great Recession, making it somewhat immune to monetary policy maneuverings.
Sweden's unemployment rate remains historically high nearly two decades after the country was hit with a severe financial crisis in the early 1990s, despite the Swedish government's highly regarded response to it, Kocherlakota told the Economic Club of Minnesota in Minneapolis. Research has shown that "financial crises tend to be followed by sustained increases in unemployment," he said.
"At a minimum, Sweden's experience forces us to contemplate the possibility that the erosion in labor market performance that we've seen in the United States over the past five years may prove to be highly persistent, even under appropriate monetary policy," Kocherlakota said.
Kocherlakota is a nonvoting member of the Federal Open Markets Committee (FOMC), the Federal Reserve's policymaking arm. He's been clear in past statements that he thinks there is no need for further Fed accommodation.
However, Kocherlakota emphasized in an interview after his speech that the Swedish experience he discussed was "a possibility and only that" and meant to illustrate "the range of uncertainties" that Fed policymakers face in attempting to achieve maximum employment.
The country is probably closer to maximum employment than the high unemployment rate of 8.1 percent would suggest, he said.
Maximum employment is one of the Federal Reserve's two core mandates, along with keeping inflation in check. The central bank in January made its inflation target explicit for the first time: 2 percent, as measured by the annual change in the price index for personal consumption expenditures.
The rate is currently 2.1 percent, drifting down from a recent high of 2.9 percent last September. The Fed has not put a number on maximum employment.
Kocherlakota has stated elsewhere that he thinks the country's jobs situation has improved and that he thinks the outlook for inflation has risen, so the FOMC should raise interest rates in 2013 or as soon as late this year. That's counter to the central bank's stated position of keeping interest rates near zero through at least late 2014.
He reiterated that the Fed may need to start the process of withdrawing from stimulus in the next six to nine months but wasn't clear on what those steps would entail.
Jennifer Bjorhus • 612-673-4683