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.'"
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