Federal Reserve

Fed's Kocherlakota blasts new rate guidance, wants low rates for longer

Kocherlakota: Threshold guidance highly effective

The Federal Reserve should have promised to keep rates near zero until U.S. unemployment falls below 5.5 percent, as long as inflation and financial stability risks are contained, said the lone dissenter to the Fed's policy decision this week.

By instead dropping its pledge to keep rates low until the jobless rate reaches a more healthy level, the Fed is sending the wrong message on both inflation and jobs, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said in remarks released on Friday.

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On Wednesday the Fed, in its first policy-setting meeting under Fed Chair Janet Yellen, said it would factor in a wide range of economic measures as it judged the correct timing for raising rates.

Narayana Kocherlakota
Craig Lassig | Bloomberg | Getty Images

The U.S. central bank has kept rates near zero since December 2008, and the Fed had since December 2012 promised to keep them there until the unemployment rate fell to at least 6.5 percent, as long as inflation did not threaten to rise above 2.5 percent.

With unemployment now at 6.7 percent, and the Fed's preferred gauge of inflation little more than half of its 2-percent target, policymakers decided to jettison what many said were becoming increasingly irrelevant guidelines.

But to Kocherlakota, one of the Fed's most dovish policymakers, dropping any reference to those thresholds "does not communicate purposeful steps being taken to facilitate a more rapid increase of inflation back to the 2 percent target," Kocherlakota said, and suggests "the committee views persistently sub-2-percent inflation as an acceptable outcome."

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It also creates uncertainty over economic growth prospects, he said, by giving little information about how fast the Fed wants the economy to return to full employment, and even about the level of unemployment it views as being consistent with full employment.

Kocherlakota has been pressing for the Fed to promise low rates until unemployment reaches the more normal level of 5.5 percent even before the Fed adopted the 6.5 percent unemployment threshold for considering any rate rise.

The promise, he said, should be contingent on inflation rising no more than a quarter of a percentage point above the Fed's 2-percent target, a stipulation he repeated on Friday.

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New in his proposal was a caveat that low rates would also be contingent on possible risks to financial stability remaining contained, a nod to the concern that some Fed officials have over the potential for sustained near-zero rates to foster unseen bubbles.

Kocherlakota said he agreed with one aspect of the Fed's new policy: its stated intent to keep rates below normal levels for some time even after inflation and the labor market return to more normal levels.

By Reuters