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Narayana Kocherlakota

Glen Stubbe, Star Tribune

Mpls. Fed chief: Help still needed for economy

  • Article by: Adam Belz
  • Star Tribune
  • March 27, 2013 - 8:59 PM

The president of the Federal Reserve Bank of Minneapolis called Wednesday for further efforts to stimulate the economy and said inflation is not a near-term risk.

Narayana Kocherlakota, speaking to a joint meeting of chambers of commerce at the Edina Country Club, repeated his call for the central bank to keep interest rates low until national unemployment falls below 5.5 percent, a full percentage point lower than the 6.5 percent threshold set by the Federal Open Market Committee in December.

“My outlook for the next two years can be summarized as being an ongoing modest recovery,” Kocherlakota said, speaking to the chambers of Bloomington, Eden Prairie, Edina and Richfield. “I expect unemployment to continue to fall only slowly, down to around 7.5 percent in late 2013 and around 7 percent in late 2014.”

To hasten the sluggish recovery and encourage more hiring, Kocherlakota believes the committee should also be more specific about what would cause it to scale back its massive asset purchasing program, known as quantitative easing.

The Fed buys roughly $85 billion in mostly government-backed assets each month to help keep interest rates low but hasn’t set clear guidelines about what would persuade it to stop or slow down the program.

“It would be very useful to be able to provide the same kind of specificity about what we’re doing with asset purchases,” Kocherlakota said.

While not currently a voting member of the committee, Kocherlakota participates in its meetings, helps set policy and has lately been one of its outspoken members.

Inflation discounted

Once considered an interest-rate hawk, he became convinced in 2012 that inflation is not an imminent threat. Since then, he’s become a vocal proponent of easier monetary policy.

In September, he joined Chicago Fed President Charles Evans in calling for the Fed to tie interest-rate policy to economic data. He called for the central bank to keep rates low until the national jobless rate falls to 5.5 percent, or the inflation outlook rises above 2.25 percent.

The Federal Open Market Committee (FOMC) followed in December, saying it would hold down rates either until unemployment falls below 6.5 percent or the inflation outlook rises above 2.5 percent.

An even lower threshold for unemployment would increase economic demand and push upward on both hiring and prices, because businesses and consumers would rightly believe rates will stay low for longer, he said.

Inflation risk is distant for now, he said, with prices of all goods and services rising an average of 1.6 percent per year for the past five years, according to the personal consumption expenditure index, which gauges prices on all goods and services, including food and energy.

“I do see inflation eventually returning to that 2 percent target under the FOMC’s current forward guidance,” he said. “But I expect a slow rate of progress.”

 

Adam Belz • 612-673-4405 Twitter: @adambelz

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