Wednesday, 10 Oct 2012

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. central bank shouldn’t automatically raise interest rates from the current record low near zero when the outlook for inflation rises above 2.25 percent.

“The committee’s decision in this context would hinge on a delicate cost-benefit calculation that would weigh the inflation increases against the employment gains,” Kocherlakota said in reference to the policy making Federal Open Market Committee.

Kocherlakota, in prepared remarks given in Great Falls, Montana, Wednesday, repeated his call for the Fed to pledge near-zero interest rates until the unemployment rate falls below 5.5 percent, as long as inflation remains below 2.25 percent. Many members of the FOMC preferred to tie monetary accommodation to specific economic conditions, minutes of the September 12-13 meeting showed.

“In the same vein, the unemployment rate of 5.5 percent should be viewed as only a threshold to initiate a policy conversation, not as a trigger for action,” Kocherlakota said in comments similar to those he gave in Ironwood, Michigan, on Sept. 20. He does not vote on policy this year.

After lowering the benchmark interest rate to near zero in December 2008, the Fed has resorted to a number of unconventional tools to support the economic recovery. Policy makers announced a third round of large-scale asset purchases last month and said they will probably keep rates low through at least mid-2015, compared with an earlier expectation of late 2014.

Still, Kocherlakota and Chicago Fed President Charles Evans have argued that the Fed could offer even more stimulus to the economy if it made its commitment more explicit with specific numbers. Fed officials worried that offering specific numbers may lead markets to expect “an automatic policy response,” minutes of last month’s meeting showed.

September’s jobs report, which showed that the unemployment rate fell to 7.8 percent from 8.1 percent even as payroll growth slowed, highlighted the difficulty of linking policy to volatile economic indicators.

Responding to those who have labeled his so-called “liftoff” proposal from Sept. 20 as either “hawkish” or “dovish,” Kocherlakota today said his plan is neither because the FOMC currently sees no tension between its goals of maximizing employment and maintaining stable prices.

“As long as the committee continues to perceive no tension between its mandates, it should not begin to raise the fed funds rate,” he said.

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