Tags: Fed | unemployment | Dangerous

Kocherlakota: Fed Targeting Unemployment May Be ‘Dangerous’

Tuesday, 22 Nov 2011 01:45 PM

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said while U.S. unemployment is too high at 9 percent, central bank policies to target a level of joblessness could lead to a jump in inflation.

“Changes in minimum wage policy, demography, taxes and regulations, technological productivity, job market efficiency, unemployment insurance benefits, entrepreneurial credit access and social norms all influence what we might consider maximum employment,” Kocherlakota said today in Winnipeg, Manitoba, Canada. “Trying to offset these changes in the economy with monetary policy can lead to a dangerous drift in inflationary expectations and ultimately in inflation itself.”

Measures to add stimulus to the economy drew dissent from Kocherlakota, Federal Reserve Bank of Philadelphia President Charles Plosser and Dallas Fed chief Richard Fisher at the central bank’s August and September meetings. A November decision to refrain from a third consecutive move drew dissent from Chicago Fed President Charles Evans, who said Nov. 15 his position is “unusual” among policy makers.

Evans has urged the Fed to keep the target for the benchmark U.S. interest rate near zero until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent.

Kocherlakota said unemployment remains “disturbingly high” and the Fed still has tools available to address economic growth, including buying more Treasury securities or mortgage- backed securities and extending the date for which the Fed pledges to keep interest rates near zero.

‘Contingency Plan’

At the same time, “the committee should provide a public contingency plan” for how it would react to variances from forecasts to reduce public uncertainty, Kocherlakota told the CFA Winnipeg.

“I’ve heard from businesses that policy uncertainty is curbing their incentive to hire or invest,” he said. “Similarly, I’ve heard from consumers that policy uncertainty is curbing their incentive to spend.”

Fed officials differed last week on whether to increase stimulus to reduce 9 percent unemployment, which Fed Chairman Ben S. Bernanke said Nov. 2 “remains on the table.”

Overall consumer prices increased 3.5 percent in the 12 months ended in October, the U.S. Labor Department said Nov. 16.

Federal Reserve Bank of New York President William C. Dudley said there’s more the Fed could do to boost the economy, such as providing clearer guidance on how long interest rates will stay low or resuming asset purchases. The St. Louis Fed’s James Bullard said it would take a deterioration in the economy to warrant more easing because action risks a rise in inflation.

Data in recent weeks have been better than forecast by economists, suggesting the economy is picking up even more this quarter. Gross domestic product climbed at a 2 percent pace in the third quarter, a revision from 2.5 percent that reflects a drop in inventories that will boost fourth-quarter growth, Commerce Department figures showed today.

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said while U.S. unemployment is too high at 9 percent, central bank policies to target a level of joblessness could lead to a jump in inflation. Changes in minimum wage policy, demography, taxes and...
Fed,unemployment,Dangerous
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2011-45-22
Tuesday, 22 Nov 2011 01:45 PM
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