Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said damage to the labor market may persist even as the expansion continues, holding U.S. unemployment higher than the usual rate since World War II.
Central bankers must “contemplate the possibility that the erosion in labor market performance that we’ve seen in the United States over the past five years may be highly persistent, even under appropriate monetary policy,” Kocherlakota said today in a speech in Minneapolis. Accelerating inflation is “a signal that our country’s current labor market performance is much closer to ‘maximum employment’ than the post-World War II U.S. data alone would suggest.”
The Fed in an April 25 statement affirmed a plan to keep its main interest rate near zero through at least late 2014, citing “elevated” joblessness. Kocherlakota added today that he believes interest rates may need to be raised earlier because the economy is improving.
“We have to be careful not to let things get ahead of ourselves in the sense that we might have to start to move as early as I indicated, in six to nine months,” the district bank head told reporters after the speech. The central bank would need to begin to “prepare the ground for raising rates” if “we continue to see inflation ticking upwards,” he said, citing his forecasts for 2 percent inflation this year and 2.3 percent in 2013.
The Federal Open Market Committee last month upgraded its forecasts for unemployment, growth and inflation for this year and noted signs the expansion was strengthening. At the same time, Chairman Ben S. Bernanke told reporters after a two-day FOMC meeting that the Fed is prepared to inject more stimulus into the economy should the recovery falter.
Since then, economic reports have painted a mixed picture of the economy. Payrolls increased at the slowest pace in six months in April, according to Labor Department figures released May 4. Still, a report today showed that jobless claims in the period ended May 5 fell to a one-month low.
Stocks rose today as concerns over Greece’s political impasse eased, sending the Standard & Poor’s 500 (SPX) Index 0.2 percent higher to 1,356.87 as of 3:52 p.m. in New York.
“I’ve personally been struck by how well they’ve been doing in the face of the challenges,” he said, referring to European policy makers’ response to the region’s debt crisis. “The FOMC statement highlights that there are risks associated with that situation, but I don’t think that those risks have changed materially for me in terms of the outlook.”
Core Inflation Up
Kocherlakota added today that so-called core inflation, which strips out energy and food, has increased “notably.” Recent labor data suggest that the employment market has become “less efficient” at matching companies and workers, he said.
As an example of the “profound and persistent” marks that financial crises can leave on an economy, Kocherlakota cited Sweden’s experience after its financial, banking and currency crisis in the early 1990s. The Swedish central bank’s estimate that the rate of sustainable rate of unemployment rose to 6 percent from a range of 2 percent to 3 percent has proven to be “remarkably accurate,” he said.
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