Bloomberg News

Kocherlakota Says Fed May Need to Reduce Accommodation

November 29, 2011

(Updates with comment on Europe in 16th paragraph.)

Nov. 29 (Bloomberg) -- Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said policy makers should begin removing accommodation in 2012, assuming their forecasts for lower unemployment and stable inflation are on target.

“It would be simplest to reduce the level of accommodation by changing” the Fed’s pledge to hold rates low through at least mid-2013 “to a shorter period of time,” Kocherlakota said in a speech today in Stanford, California. He told reporters beforehand that the Fed needs to be “clearer” and “sharper” about its objectives.

The bank president’s remarks underscore divisions within a central bank that’s struggling to reduce a jobless level stuck near 9 percent or higher for more than two years. Four officials have dissented at policy-making meetings this year, with Chicago Fed President Charles Evans calling for more stimulus while Kocherlakota, Richard Fisher of Dallas and Charles Plosser of Philadelphia voted against further easing.

Today, Vice Chairman Janet Yellen said in San Francisco the Fed has leeway to spur the U.S. recovery and cut unemployment by buying more assets or clarifying its plan to sustain record-low borrowing costs. San Francisco Fed President John Williams told reporters that he supports the idea of an asset-purchase program that can be altered over time.

Atlanta Fed President Dennis Lockhart said during a speech at the University of Georgia that expanding securities purchases is unlikely to give a sufficient boost to U.S. growth. He didn’t rule out the strategy or other easing options.

Sufficient Boost

The Federal Open Market Committee’s efforts to push down unemployment by easing policy this year, while appearing to place less emphasis on inflation risks, “served to weaken the committee’s credibility,” Kocherlakota said at the Stanford Institute for Economic Policy Research. He reiterated his support for a “public contingency plan” that would detail Fed policy actions under various economic scenarios.

Stocks in the U.S. rose following a report that U.S. consumer confidence increased by the most since 2003. The Standard & Poor’s 500 Index gained 0.2 percent to 1,195.19 in New York.

Data released since the Fed’s most recent gathering show the U.S. jobless rate unexpectedly fell in October to a six- month low of 9 percent, from 9.1 percent a month earlier. An 80,000 increase in payrolls followed gains in the prior two months that were revised up by 102,000, Labor Department figures showed in Washington.

Previously Estimated

The economy expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close. Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed last week.

Fed officials currently expect unemployment to fall to 8.6 percent in 2012 and 8 percent in 2013, while inflation excluding food and energy should drop from 1.9 percent to 1.7 percent over the next two years, Kocherlakota said.

A comparison of those projections with estimates of how the economy will evolve next year suggests that “the committee should reduce the level of monetary accommodation over the course of 2012,” he said. That would mean shrinking the amount of time it takes for the Fed to begin its exit strategy, he said.

The regional chief added that he sees unemployment falling more gradually than he previously thought, and the impact of any future accommodation by the Fed is likely to be “marginal.”

Stay Very Low

The FOMC at its Nov. 1-2 meeting left the benchmark interest rate in a range of zero to 0.25 percent, where it’s been since December 2008, and reiterated language that said the rate is likely to stay very low through at least mid-2013. The central bank also continued its so-called Operation Twist program to buy $400 billion of longer-term securities and sell $400 billion of short-term debt.

Additional asset purchases would constitute a third round of so-called quantitative easing after the Fed bought $2.3 trillion in housing and government debt in two rounds from December 2008 to June 2011.

Kocherlakota, who has led the Minneapolis Fed since October 2009, built his career in academia and is former chairman of the economics department at the University of Minnesota in Minneapolis. He dissented in August and September to the mid-2013 pledge and Operation Twist, saying economic conditions had actually improved -- not worsened -- over the past year.

The 48-year-old policy maker reiterated his concern that the FOMC’s accommodative actions suggest that its objectives for price stability have “shifted upward.” He also said the pace of events in Europe suggest a “greater risk” of adverse economic outcomes.

--With assistance from Joshua Zumbrun in Washington. Editors: James Tyson, Gail DeGeorge

To contact the reporter on this story: Vivien Lou Chen in San Francisco at

To contact the editor responsible for this story: Chris Wellisz at

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