As stock markets foundered and mortgage rates climbed on Monday, the Minneapolis Fed chief called for his colleagues at the Fed to be more precise about their long-term plans.
Narayana Kocherlakota said the Fed has “provided insufficient detail about how its policy strategy will play out when the recovery is more advanced.”
The president of the Federal Reserve Bank of Minneapolis thinks the central bank could calm the markets by better emphasizing that it will keep interest rates low even after it ends the bond-buying program known as quantitative easing. The Fed’s evolving position, he said, is less hawkish than people are apparently thinking.
His statements came less than a week after Federal Reserve Chairman Ben Bernanke smote the financial world by saying the days of quantitative easing are numbered.
The Fed is buying $85 billion in mortgage-backed securities each month, which has helped drive down rates to the point where 3.3 percent 30-year fixed mortgages were available in November. The low cost of long-term borrowing also helped the Dow Jones industrial average break 15,000 in May for the first time in history.
Bernanke said Wednesday that the economy might be becoming strong enough that the Fed could start to scale back the program and eventually end it.
Investors responded with a stock sell-off that lasted the rest of the week and continued Monday, and interest rates are rising. Yields on 10-year Treasurys rose to above 2.5 percent for the first time since 2011.
Mortgage rates climbed in places to 4.5 percent, as the bond market anticipates the exit of one of its largest customers. News of a slowdown and possible credit crunch in China have not helped calm investors.
In a conference call with reporters, Kocherlakota said he thinks the Fed should continue to buy mortgage-backed securities at least until the unemployment rate falls below 7 percent and should keep interest rates near zero until the unemployment rate has fallen below 5.5 percent, in both cases as long as the medium-term outlook for inflation remains below 2.5 percent.
This is consistent with what the Fed said last week, and Kocherlakota said he has no disagreement with the content of the Federal Open Market Committee’s statement.
The problem, he said, is that the Fed doesn’t emphasize strongly enough a point that comes in the fifth paragraph of the statement: “The Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
“We bury the lead on this,” Kocherlakota said. “We have to bring that forward and hammer it every time we talk about policy, that that’s our guiding principle.”
Kocherlakota thinks the Fed should be clear that it is committed to keeping the federal funds rate low at least until unemployment falls to 5.5 percent.
Asked if the market’s reaction to last week’s statement is evidence that the economy is hooked on easy monetary policy, Kocherlakota dismissed the whole analogy.
“I never understood the addiction analogy that is popular with reporters,” Kocherlakota said. “I think of us as providing a coat for the economy. It’s still wintry conditions.
“I know it feels like it should be May by now, and we should be able to take off the coat,” he said. “But we well know in Minneapolis that that doesn’t always happen. And you should keep your coat on when it’s cold out.”