Bloomberg News

Fed’s Kocherlakota Says Economy Doesn’t Need More Stimulus

September 06, 2011

(Updates with comment on disinflation in sixth paragraph.)

Sept. 6 (Bloomberg) -- Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. economy didn’t need additional stimulus in August and probably won’t require more easing this month.

“The data in August did not justify the additional accommodation provided” by the central bank on Aug. 9, Kocherlakota said today in a speech in Minneapolis. “It is unlikely that the data in September will warrant adding still more accommodation.”

Kocherlakota signaled reluctance to back more stimulus even after the Labor Department reported last week that the economy added no jobs in August and the unemployment rate remained unchanged at 9.1 percent. His speech is similar to remarks he delivered last week in Bismarck, North Dakota.

Payrolls were unchanged, the weakest reading since September 2010, the Labor Department said Sept. 2. The median forecast in a Bloomberg News survey called for a gain of 68,000. The August jobless rate marked the 29th consecutive month of unemployment near 9 percent or higher.

Kocherlakota said last month he opposed a plan by the central bank to keep interest rates low at least through mid- 2013 in part because monetary stimulus had reduced the jobless rate. More easing won’t be necessary unless inflation slows or unemployment rises, he said to reporters on Aug. 30.

“It continues to be a concern going forward, that there are strong disinflationary pressures” in the economy, Kocherlakota said in response to audience questions at the University of Minnesota’s Carlson School of Management.

‘Doing Very Well’

“I think right now we’re doing very well in that perspective,” he said, citing the rise in inflation since the summer of 2010 and his forecast that inflation will remain at around 2 percent during this year and next.

Asked if he thought the economy would relapse into recession, the regional Fed chief said “it’s my expectation we will not have a recession.”

“I still see sufficient sources of strength in the economy,” he said, saying that the unwinding of temporary factors, like supply chain disruptions from the Japanese earthquakes and tsunami and the spike in energy prices, would provide a “little impetus” to growth.

On Aug. 9, Kocherlakota joined two other regional bank presidents, Charles Plosser of Philadelphia and Richard Fisher of Dallas, in posing the most opposition to a Fed decision since 1992. They dissented from the FOMC’s pledge to hold interest rates in a range of zero to 0.25 percent until at least mid- 2013, preferring instead to maintain a commitment to do so for an unspecified “extended period.”

A ‘Bit’ Lower

“The Committee’s decision in August to make monetary policy more accommodative is inconsistent with its declared intention to keep inflation at 2 percent or a bit under,” Kocherlakota said.

The Fed needs to formulate and communicate its objective for inflation, Kocherlakota said.

“Most importantly, it needs to ensure the credibility of that communication by responding to macroeconomic conditions so as to ensure that inflation stays close to its announced objective,” he said. “Losing that credibility would represent a substantial failure on the Federal Reserve’s price stability mandate and would also likely lead to substantial failures on the Federal Reserve’s maximum employment mandate.”

A few Fed policy makers in August favored more aggressive action to stimulate the economy and lower unemployment, minutes of their meeting released last week showed.

Bigger Move

Those members, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the last FOMC meeting to hold its key interest rate at a record low until mid-2013.

The Fed may decide at its next meeting on Sept. 20-21 to replace short-term Treasury securities in its $1.65 trillion portfolio with long-term bonds in a bid to lower rates on everything from mortgages to car loans, said economists at Wells Fargo & Co., T. Rowe Price Associates Inc., Barclay’s Capital Inc. and Goldman Sachs Group Inc.

“Any additional provision of accommodation in September or thereafter will have to be judged on its own merits,” Kocherlakota said. “Some readers or listeners may have found this statement to be imprecise. So, let me elaborate on what I meant then, and continue to believe. I assess FOMC actions in light of the incoming data and the Committee’s communicated objective of keeping inflation at 2 percent or a bit under.”

Inflation Rate

The personal consumption expenditures price index rose 2.8 percent from a year earlier in July, compared with 1.2 percent in November when the Fed launched its $600 billion round of asset purchases known as QE2 for the second round of quantitative easing. Excluding food and energy, the index rose 1.6 percent from a year ago, compared with 1 percent in November. The Fed aims for annual inflation of 1.7 percent to 2 percent.

Political infighting over the budget and mounting fear of a default in Europe helped drive the Standard & Poor’s 500 Index down 17 percent from July 22 to the start of the Fed’s last policy meeting on Aug. 8, prompting companies and consumers to cut back. The S&P 500 fell 1.5 percent to 1,160.92 at 2:45 p.m. in New York.

Kocherlakota, 47, received his doctorate in economics from the University of Chicago. He taught at the University of Minnesota before becoming president of the Minneapolis Fed in October 2009.

--Editors: James Tyson, Kevin Costelloe

To contact the reporter on this story: Joshua Zumbrun in Minneapolis at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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