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Fed's Kocherlakota: 'inappropriate' to raise rates in 2015

Wednesday, October 8, 2014 - 06:49
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Minneapolis Federal Reserve Bank President Narayana Kocherlakota, who has a vote on the central bank's policy-setting Federal Open Market Committee through the end of this year, said he doesn't see inflation rising back to the Fed's 2-per cent goal until 2018 - PHOTO: REUTERS

[RAPID CITY] The Federal Reserve should keep interest rates near zero through at least the end of next year, a top US central banker said on Tuesday, saying that inflation is simply too low to justify tighter monetary policy.

Minneapolis Federal Reserve Bank President Narayana Kocherlakota, who has a vote on the central bank's policy-setting Federal Open Market Committee through the end of this year, said he doesn't see inflation rising back to the Fed's 2-per cent goal until 2018. "This sluggish inflation outlook implies that, at any FOMC meeting held during 2015, inflation would be expected to be below 2 per cent over the following two years," Kocherlakota said in remarks prepared for delivery to the Rapid City Economic Development/Black Hills Knowledge Network Forum. "It would be inappropriate for the FOMC to raise the target range for the fed funds rate at any such meeting." Most of his colleagues disagree, with all but three indicating at the Fed's most recent meeting that they view a 2015 rate increase as appropriate. Fed officials who support raising rates cite falling unemployment, which dropped to a six-year low of 5.9 per cent in September, and other signs the US economy is strengthening.

Kocherlakota, however, notes that even 5.9 per cent unemployment is above the 5 per cent rate he views as consistent with a healthy economy. And inflation has lingered below 2 per cent for years, with "little sign of an uptick," he said.

The Fed has kept rates near zero since December 2008 and bought trillions of dollars of Treasuries and housing-backed securities to push down borrowing costs and pull the economy free from the effects of the Great Recession. But so far, Kocherlakota said, "monetary policy has proven to be insufficiently accommodative to offset either the price or employment effects of this large shock." To make its policies more effective, Kocherlakota argued, the Fed should impose a two-year horizon on its 2-per cent inflation goal, and make it clear that it is just as concerned about inflation running below target as it is about inflation overshooting.

The Fed should consider incorporating those changes into a policy framework that was first articulated in January 2012, he said. - Reuters

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