Kocherlakota: Inflation to stay subdued until 2018

Narayana Kocherlakota
Craig Lassig | Bloomberg | Getty Images
Narayana Kocherlakota

Labor markets remain weak and inflation will be subdued for years, leaving plenty of room to keep monetary policy loose, Minneapolis Federal Reserve President Narayana Kocherlakota said Friday.

In a speech delivered at the Independent Community Bankers of Minnesota's annual meeting, Kocherlakota said the central bank's Federal Open Market Committee has plenty of room before inflation pressures become substantial enough to warrant an interest rate increase. The FOMC has set a 2 percent target for the personal consumption expenditures index, or PCE, as well as a 6 percent unemployment rate before it will begin to consider raising interest rates.

Though unemployment is just two-tenths of a point away from hitting the Fed goal, the PCE remains at 1.6 percent despite persistently high gas prices and beef, chicken and fish at record levels.

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"The Congressional Budget Office predicted that inflation will not reach 2 percent until 2018—more than 10 years after the beginning of the Great Recession. I agree with this forecast," Kocherlakota said, according to prepared remarks. "This means that the FOMC is still a long way from meeting its targeted goal of price stability."

As for the jobs market, the steady drop in the unemployment rate, which fell from 6.6 percent in January to 6.2 percent for July, "masks continued weakness in labor markets."

Indeed, the decline has come amid a labor-force participation rate hovering around 35-year lows. Because the Bureau of Labor Statistics does not include those who have left the labor force and are not actually looking for a job when calculating the headline unemployment rate, the drop is widely seen as not reflective of the true strength of the labor market.

A separate measure that includes discouraged workers as well as those working part time for economic reasons—the underemployed—has remained stubbornly high at 12.2 percent, though that has dropped from the January level of 12.7 percent.

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So-called slack in the labor market is critical for policy doves like Kocherlakota, who support Chair Janet Yellen's position that the Fed needs to keep its policy accommodative until other measures such as wages and average hours worked improve.

"There are many people in this country who want to work more hours, and our society is deprived of their production," he said.

Kocerhlakota's remarks come as minutes from recent meetings and speeches from other Fed officials indicate growing disagreement about the future course.

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St. Louis Fed President James Bullard, who is not a voting member this year, said Thursday the Fed should raise rates by the end of the first quarter of 2015, while Philadelphia Fed President Charles Plosser provided a dissenting vote at the most recent Fed meeting.

—By CNBC's Jeff Cox