The Federal Reserve should do everything it can to bring unemployment down as quickly as possible, even at the cost of a little inflation, a top Fed official said on Thursday.
"Doing whatever it takes will mean keeping a historically unusual amount of monetary stimulus in place, and possibly providing more stimulus," Minneapolis Federal Reserve President Narayana Kocherlakota said in the text of remarks to the Rotary Club of Houghton, Mich. "Low levels of inflation show that the (Fed) has a lot of room to provide much needed stimulus to the labor market."
The Fed last week unexpectedly kept to its program of buying $85 billion in Treasurys and mortgage-backed securities each month to push down long-term borrowing costs and boost investment and hiring.
Economists, keying off of cues that Fed officials had given for months, had expected the Fed to declare the labor market improved and to begin to trim the stimulus.
Kocherlakota on Thursday argued that the U.S. labor market is still far from healthy and requires continued, and perhaps additional, monetary stimulus to bring it back to normalcy.
He said that the perception the Fed has neither the tools nor the will to fight high unemployment contributes to continued expectations for slow growth, which in turn helps perpetuate weak economic conditions.
The Fed must be "willing to continue to use the unconventional monetary policy tools that it has employed in the past few years," Kocherlakota said.
And in doing so, the central bank should be willing to tolerate some short-term economic pain, he said.
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It should keep up stimulus even as employment rises appreciably, growth exceeds historical averages, unusually high asset price rises lead to concern about bubbles and medium-term inflation rises temporarily above the Fed's goal of 2 percent, he said.
Invoking former Federal Reserve Chairman Paul Volcker's assault on high inflation in 1979, Kocherlakota in effect called for a new monetary policy war, this time on excessively high unemployment.
Volcker raised rates so rapidly he pushed the economy into recession, but the shock strategy ultimately defeated inflation and set the stage for future economic expansions.
"In 2013, the (Fed's) goal should be to return employment to its maximal level as rapidly as it can, while still keeping inflation close to, although possibly temporarily above, the target of 2 percent," Kocherlakota said in the speech, entitled "A Time of Testing," the same title that Volcker used when he declared his all-out war on inflation.
A policy dove, Kocherlakota a year ago in a place not too far from here urged the Fed to promise to keep interest rates near zero until unemployment fell to 5.5 percent, a full percentage point lower than the Fed's current vow.
Doing so would provide an added boost to the economy and to hiring, he said.
He did not repeat that call, nor offer any other details on what he meant by additional monetary stimulus.
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The Fed has bought trillions of dollars of bonds to push down long-term interest rates, kept short-term interest rates near zero since December 2008 and declared it will not raise those rates until unemployment falls to at least 6.5 percent.
Unemployment is currently at 7.3 percent, a statistic that Kocherlakota said overstates the strength of the labor market because many people who would like to work, or would like to work more, have given up in the face of little job availability.