The president of the Minneapolis Fed on Tuesday repeated his call for continued efforts to stimulate the sluggish economy.
With fresh ammunition from a study suggesting that the Federal Reserve could drive down unemployment faster if it promised to keep interest rates low for longer, Narayana Kocherlakota called “puzzling” the public debate over when the Fed will taper its $85 billion per month bond-buying program, known as quantitative easing.
Unemployment is still too high to back off the program, he said, and runaway inflation, the main risk of continuing the policy of extremely low interest rates, is not currently a threat.
“Inflation rates are very low by historical standards, relative to the goal of 2 percent a year, so there’s no reason to be afraid of monetary stimulus,” Kocherlakota said at a St. Paul Chamber of Commerce lunch.
Kocherlakota’s speech comes amid a big debate about the economy, and how much the Fed can and should be doing to jump start it. The Fed is buying an unprecedented amount of mortgage-backed securities to hold down long-term interest rates, in hopes this will stimulate borrowing, spending and economic growth.
Amid constant speculation over when the Fed will back off the program, and criticism from some who think the central bank’s balance sheet has gotten too big, Kocherlakota has repeatedly called for the Fed to stay the course. He argues that the central bank should continue holding down interest rates until U.S. unemployment — now at 7.3 percent — falls below 5.5 percent, or until the two-year outlook for inflation rises above 2.5 percent.
The Fed could also, he said, lower the interest rate being paid to banks on their excess reserves, which would give them incentive to lend that money to businesses and consumers instead of holding onto it.
Kocherlakota’s general position was bolstered by a study published by three Fed economists including William English, director of monetary affairs for the Federal Reserve Board of Governors, and released this month. The study’s models show that “reducing the unemployment threshold improves measured economic performance until the unemployment threshold reaches 5.5 percent.”
And another regional Fed president, Atlanta’s Dennis Lockhart, also spoke Tuesday, arguing that the Fed shouldn’t start to scale back quantitative easing until inflation moves higher.
Kocherlakota, who took over the Minneapolis Fed in 2009, has become one of the more vocal proponents of the Fed’s doing more to stimulate the economy, after being considered an interest rate hawk as recently as 2011. He has not been a voting member of the Fed’s monetary-policy-setting Federal Open Market Committee (FOMC) this year, but all members influence its decisions and he’ll have a vote in 2014.
The U.S. jobless rate is still too high, he said, and it understates the weakness of the job market since it doesn’t count workers who’ve given up the job search. The nation’s employment-to-population ratio, which helps capture this shrinkage of the labor force, is historically low, and not just because of the retirement of baby boomers.
“The weak labor market represents considerable hardship for a large number of Americans, both in economic terms and in psychological terms,” Kocherlakota said. “It represents a significant waste of resources for the national economy, because our country is failing to use a large fraction of our human potential.”