Fed heading wrong way, should ease policy: Kocherlakota

Reuters with CNBC.com
Friday, 10 Jan 2014 | 8:53 AM ET

Faced with high unemployment and stubbornly low inflation, the Federal Reserve should be ramping up—not scaling back—its monetary stimulus, a top Fed official says.

The central bank, charged by Congress to aim for an economy that has enough jobs and also stable prices, "could do better with respect to both of its congressionally mandated objectives by adopting a more accommodative monetary policy stance," Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, said Thursday at a town hall event at the regional bank's headquarters.

Narayana Kocherlakota
Craig Lassig | Bloomberg | Getty Images
Narayana Kocherlakota

"I think we do have to be really careful about the process of slowing or reducing the monetary footprint," he said.

Kocherlakota's dovish remarks, delivered a day before the Labor Department reported that only 74,000 jobs had been created in December, suggest that when he gets his turn to vote on the Fed's policy-setting panel this month, he may use it to dissent if the Fed continues to dial down stimulus. Eleven of the 12 regional Fed presidents rotate in and out of year-long voting spots on the panel every two or three years; of the regional chiefs, only the New York Fed chief gets a permanent vote.

(Read more: Job growth weak, raising questions about Fed move)

The Fed last month began what is expected to be a measured winding down of a massive bond-buying program aimed at lowering long-term borrowing costs and boosting hiring. Kocherlakota expects the Fed, which cut purchases to $75 billion a month from $85 billion, to keep reducing the bond-buying as long as the economy improves as expected.

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With unemployment down from its recent 10-percent peak and the labor market outlook improving, most Fed policymakers felt that easing up on the monetary policy gas was appropriate.

Not so Kocherlakota.

Inflation is running at about half of the Fed's 2 percent goal and unemployment has fallen "disturbingly slowly," he told his audience.

"By easing monetary policy relative to its current stance, the (Fed) could facilitate a more rapid fall in unemployment and more rapid return to 2 percent inflation," he said.

Kocherlakota said he expects economic growth to pick up to about 3 percent this year, and for unemployment to fall to 6.5 percent. But that jobless rate underestimates the weakness in the economy, he said, because it reflects a large number of people who have simply given up looking for work in the face of a tough economy.

(Read more: Yellen hopeful for 3% GDP growth in 2014)

As long as inflation remains low, he said, the Fed has room to add stimulus and bring down unemployment.

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The last time he had a vote on the policy-setting Federal Open Market Committee, Kocherlakota cast it with the Fed's hawkish wing in dissenting against what he saw then as overly stimulative Fed policy.

Kocherlakota underwent a conversion of sorts in October 2012, swinging from a position as one of the most hawkishly inclined Fed officials to his current, dovish stance.

It was then that he first proposed the Fed pledge to keep rates low until the unemployment rate falls to at least 5.5 percent. Last month, the Fed said it would likely keep rates low until well past the time the unemployment rate hits 6.5 percent, but stopped short of lowering that threshold to the level that Kocherlakota says would give the economy a bigger boost. On Friday, the Labor Department said the unemployment rate had dipped to 6.7 percent.

Normally the Fed has 12 voters on monetary policy, but because of recent and expected departures at the Fed Board of Governors, it only has 10 currently.

That number would drop again next month if Ben Bernanke resigns from the board, as expected, when his term as chairman expires.

—By Reuters with CNBC


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