Fed’s Kocherlakota Backs More Accommodation

Minneapolis Fed president reverses hawkish stance, ties policy to jobless rate.

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said battling unemployment may mean keeping interest rates close to zero for four years, reversing his view that borrowing costs might have to rise as soon as this year.

As long as inflation doesn’t exceed 2.25 percent, the Fed “should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” Kocherlakota said. The comment aligns him with the Federal Open Market Committee’s decision last week to continue purchasing bonds until labor markets “improve substantially.” Kocherlakota is one of the first Fed officials to specify what he considers improvement in the labor market.

“They’re sending a message to people making long-term decisions about investment and hiring: Don’t worry about us clamping down, we are going to have accommodative policy even in a stronger recovery,” said Michael Gapen, senior U.S. economist at Barclays Plc’s investment-banking unit and a former member of the Fed’s Division of Monetary Affairs. “They are telling you, ‘We have a long way to go, and we are going to let this run.’”

Before yesterday’s speech in Ironwood, Michigan, Kocherlakota was one of four regional bank presidents who warned of higher inflation, resisted Fed pledges to hold rates near zero into the future or argued that monetary policy can do little to improve employment. Presidents Jeffrey Lacker of Richmond, Dallas’s Richard Fisher and Philadelphia’s Charles Plosser voiced such views this year.

The shift in focus among Fed officials from inflation- watching to labor-market improvement underscores their focus on long-term joblessness. The proportion of the unemployed out of work for 27 weeks or more has persisted at 40 percent or higher since December 2009. Fed Chairman Ben S. Bernanke called job market stagnation -- where the jobless rate has been above 8 percent for 43 months -- “a grave concern.”

Boston Fed President Eric Rosengren, speaking in Quincy, Massachusetts yesterday, said faster growth is needed to avoid labor-market “scarring -- where long-duration unemployment becomes ingrained into our labor market.”

The FOMC said in a Sept. 13 statement that economic conditions would probably warrant holding the Fed’s target interest rate near zero through at least mid-2015 and that monetary stimulus will remain appropriate for a “considerable time” after growth strengthens.

The FOMC’s latest easing -- including a plan to buy $40 billion of mortgage-backed securities each month -- has drawn fire from some Fed presidents, including Fisher. He said Sept. 19 the bond-buying will probably fail to create jobs while risking a faster rise in prices. Lacker said on Sept. 18 that more stimulus “runs the risk of raising inflation.”


Voting Member

Lacker is a voting member of the FOMC this year and was the only policy maker to dissent at the Sept. 12-13 meeting. Next year Rosengren will have voting power on the panel. Kocherlakota won’t vote until 2014.

St. Louis Fed President James Bullard said yesterday he opposes tying policy to a target for the unemployment rate, which he believes isn’t the best measure of job market health.

“Unemployment is a fickle variable,” he said to reporters after a speech in South Bend, Indiana.

“It can go up and down because of labor force participation changes as has happened in recent years and even the most recent unemployment report,” Bullard said. “We would be better served by taking an overall approach to labor market conditions.”

Most U.S. stocks fell as data from China to Japan and Europe increased concern that a global economic slowdown is worsening. The Standard & Poor’s 500 Index lost 0.1 percent to 1,460.26, trimming an earlier decline of as much as 0.8 percent.

Kocherlakota said in April he expected unemployment to fall to around 7 percent by the end of 2013 with inflation rising to 2.3 percent. He added that the committee would “need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012,” according remarks to a chamber of commerce published on the bank’s website.

In the same speech Kocherlakota said he would favor more stimulus if the outlook for unemployment rose or if inflation forecasts fell “sufficiently.”

In May, Kocherlakota said “it’s an appropriate time to start thinking about when to begin the process of reversing the level of accommodation.”


‘Exit Strategy’

“Six to nine months down the road, we should be thinking about initiating our exit strategy,” he said.

The personal consumption expenditures price index decelerated to a 1.3 percent increase for the 12 months ending July from a 2.4 percent 12-month increase in January.

Kocherlakota yesterday embraced a proposal by Chicago Fed President Charles Evans to calibrate monetary policy based on specific economic goals. Evans advocates holding to near-zero rates until the jobless rate falls below 7 percent or inflation reaches 3 percent.

“My thinking has been greatly influenced by his,” Kocherlakota said, referring to Evans. “By increasing monetary accommodation, the Committee can better meet its employment mandate while still satisfying its price-stability mandate,” Kocherlakota said at Gogebic Community College.

Speaking to reporters after his speech, Kocherlakota said his view shifted in recent months partly because of a diminished inflation threat.

Also, recent research indicates “much of what’s going on with the unemployment rate is not structural,” suggesting that the Fed has more room to bolster growth without stoking inflation, he said.

The Baltimore-born Kocherlakota, who entered Princeton University in New Jersey at the age of 15 and received a doctorate from the University of Chicago at 23, was a staff economist at the Minneapolis Fed from 1996 to 1998 and a consultant to the bank between 1999 and 2009. He became the 12th president of the Minneapolis Fed bank in October 2009.


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