The Minneapolis Fed chief said Tuesday that the central bank should keep interest rates down until national unemployment falls to 5.5 percent, the latest in a series of pronouncements that have lately made Narayana Kocherlakota the most outspoken inflation dove at the Federal Reserve.
"Some might be concerned that this move would give rise to undue inflationary pressures," he told the Financial Planners Association of Minnesota in a prepared speech over breakfast at the Golden Valley Country Club. "I see that possibility as unlikely -- and, even if I'm wrong in my assessment, the committee's forward guidance provides tight inflation safeguards."
The Fed is already buying roughly $85 billion in mostly government-backed assets each month to keep interest rates low, hoping to encourage spending and boost hiring across the nation. The central bank's policymaking 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.
December's announcement was the first time the Fed announced explicit inflation and unemployment thresholds guiding monetary policy, something Chicago Fed President Charlie Evans had been advocating since 2011. Kocherlakota, president of the Federal Reserve Bank of Minneapolis, started calling for the same thing in 2012.
The Fed sees the way it communicates -- its "forward guidance" -- as a form of stimulus. If the public believes interest rates will be low until a numerical threshold is met, that should stimulate economic growth.
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.
His views have evolved and are evolving, he said Tuesday, based on the Fed's dual mandate of holding down inflation and pushing for maximum employment.
"You want to call me dovish or hawkish," he said. "I'm just a person who's trying to set policy so as to achieve the goals set by Congress."
He has predicted slow progress for the economy over the next two years, with 2.5 percent output growth in 2013, 3 percent growth in 2014, and U.S. unemployment not falling to 7 percent until late 2014.
Since low interest rates theoretically lead to more lending, spending and hiring, the Fed's policy should drive down unemployment and thus drive up wages, which would raise the prospect of inflation. Kocherlakota acknowledged Tuesday that, so far, monetary stimulus hasn't unleashed enough lending to help drive unemployment down to pre-recession levels.
But, he said, low interest rates have stimulated the economy in other ways. The policy has pushed up the prices of assets like stocks, empowering consumers to spend more. It has also held down the value of the dollar, encouraging exports.
Fed policy may not be fueling a roaring recovery, he said, but that's no reason to reverse the policy -- unless inflation rears its head.
"All told, I think the policy is stimulative," Kocherlakota said. "When I think through that logic, where policy is stimulative but not as stimulative as it would otherwise be, it doesn't mean that I want to back away from stimulus."
Asked what he would tell a retired person whose returns on their savings have been reduced by low interest rates, Kocherlakota said low rates may be less beneficial for them, but they are good for the economy as a whole.
Also, he said, Fed policy is not the only reason interest rates are down. The larger reason is a post-recession flight to safety, he said. Investors across the country are looking for low-risk places to park their money, which drives down the rewards of low-risk investment thanks to the glut of demand.
"The supply of safety has shrunk and the demand for safety has gone up," he said. "That, I think, is a huge fundamental force in the economy, and that transcends what's happening with monetary policy."
Adam Belz • 612-673-4405 Twitter: @adambelz