Bloomberg News

Kocherlakota Sees Record Fed Stimulus as ‘Too Tight’

January 10, 2013

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank may not be providing enough accommodation given his outlook for prices and the job market.

“Inflation will run below the Fed’s target of 2 percent over the next two years and the unemployment rate will remain elevated,” Kocherlakota said in the text of remarks prepared for a speech today in Minneapolis. “If anything, monetary policy is currently too tight, not too easy.”

The Federal Open Market Committee last month expanded its bond purchase program and linked policy to economic indicators for the first time, seeking to fuel growth and reduce a 7.8 percent unemployment rate in December. Officials said they will probably end so-called quantitative easing sometime this year, according to minutes of the Dec. 11-12 meeting.

“I expect unemployment to continue to fall only slowly, down to around 7.5 percent in late 2013 and around 7 percent in late 2014,” Kocherlakota said at a forum held at the Minneapolis Fed.

The Minneapolis Fed president was an early advocate for tying the Fed’s zero-rate policy to economic data, first calling for the change in a speech in September. The FOMC adopted a variation of what the district bank president advocated in the committee’s December meeting.

Officials expect to keep rates near zero as long as joblessness is above 6.5 percent, inflation is projected to be no more than 2.5 percent and longer-term price expectations are well anchored, the central bank said. The Fed previously said it will keep rates low through at least mid-2015.

Excessive Easing

Kansas City Fed President Esther George in a speech today warned of excessive easing, saying a prolonged period of low interest rates may fuel the risk of financial instability and a surge in inflation. The central bank has held the benchmark interest rate near zero since December 2008.

Asset purchases by the Fed will “almost certainly increase the risk of complicating the FOMC’s exit strategy” from record stimulus because bonds will need to eventually be sold, George said today in a speech in Kansas City, Missouri.

“Like others, I am concerned about the high rate of unemployment, but I recognize that monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it,” George said.

U.S. stocks rose to a five-year high today after reports in China pointed to a sustained pickup in Asia’s largest economy. The Standard & Poor’s 500 Index increased 0.8 percent to 1,472.12.

‘High Levels’

Prices “of assets such as bonds, agricultural land and high-yield and leveraged loans are at historically high levels” and may signal market imbalances, George said.

Kocherlakota said today that the economy will probably grow about 2.5 percent this year and 3 percent in 2014. Inflation, as measured by the personal consumption expenditures index, will probably be 1.6 percent this year and 1.9 percent next year, below the Fed’s 2 percent goal, he said.

At the Dec. 11-12 meeting, the Fed expanded its bond purchase program to offset the end of Operation Twist, in which the central bank swapped short-term Treasuries for longer-term bonds. The Fed is now each month buying $85 billion in government bonds and mortgage securities.

Policy makers may have difficulty tying bond purchases to inflation and the unemployment rate, as the Fed has with its zero-rate policy, St. Louis Fed President James Bullard said today in Madison, Wisconsin.

‘Too Far’

“Attempts to also put thresholds on the timing of asset purchases may be a bridge too far,” Bullard said to the Wisconsin Bankers Association in Madison, Wisconsin. He said last week that unemployment could drop to about 7 percent by the end of this year, which may be enough improvement for the FOMC to halt bond purchases.

That pace would be a continuation of the decline in the unemployment rate since October 2009, when the rate hit 10 percent. Since then, the level has declined by about 0.7 percentage point per year, Bullard told reporters.

If that pace continues the current 7.8 percent jobless rate could decline to around 7 percent by the end of this year and “would get us to 6.5 percent sometime in the middle of 2014,” Bullard said.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net.

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


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