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Fed’s Kocherlakota Says 6.5% Unemployment Is No Rates ‘Trigger’

Wednesday, 27 March 2013 01:44 PM

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Federal Open Market Committee may choose not to raise the main interest rate when the jobless rate falls below 6.5 percent.

“The unemployment rate threshold is not a trigger for FOMC action,” Kocherlakota said in the text of a speech prepared for delivery today in Edina, Minnesota. He also said that the committee’s guidance provides “a great deal of protection against undue inflationary pressures.”

The policy-setting FOMC said last week it will keep the federal funds rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation does not exceed 2.5 percent. The committee also said it will leave the pace of asset purchases unchanged at $85 billion a month.

Should the central bank’s inflation outlook ever rise above 2.5 percent, its commitment to keep rates near zero “is off the table,” said Kocherlakota, who doesn’t vote on the FOMC until 2014. “I would see a breach of this threshold as being a cause for significant concern.”

Policy makers haven’t had a medium-term outlook for inflation as high as 2.25 percent during the past 15 years, the Fed district bank chief told a gathering of Minneapolis-area business leaders. That means an outlook of more than 2.5 percent “should be seen as being highly unusual” and should prompt the FOMC “to strongly consider an aggressive response.”

Economic Outlook

Kocherlakota maintained his prior forecasts that gross domestic product probably will expand by 2.5 percent this year and 3 percent next year, and that unemployment will “continue to fall only slowly,” to 7.5 percent in late 2013 and 7 percent in late 2014. Inflation measured by the personal consumption expenditures index “will remain subdued” at 1.6 percent in 2013 and 1.9 percent in 2014, he said.

Kocherlakota repeated his view that “monetary policy is currently not accommodative enough” and that the central bank should do more to spur economic growth and hiring.

The Fed started a third round of quantitative easing in September with $40 billion of monthly agency mortgage-backed securities purchases. The program was expanded in December with $45 billion of monthly purchases of Treasury notes.

Kocherlakota offered ways to increase monetary accommodation, including reducing policy uncertainty “by clarifying the nature of the economic conditions that would lead” the FOMC to reduce or stop asset-buying. “Alternatively, the committee could communicate to the public that, once the removal of monetary accommodation eventually commences, the rate of withdrawal will be slower than is currently anticipated,” he said.

Data Thresholds

Kocherlakota was among the earliest advocates of tying the Fed’s interest-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.

The world’s largest economy grew at a 0.1 percent annual rate in the fourth quarter, compared with a previously estimated 0.1 percent drop, the Commerce Department said Feb. 28. Growth will be 1.9 percent this year, according to the median of 81 economist estimates in a March 8-13 Bloomberg survey.

When the central bank began its third round of large-scale asset purchases in September, the most recent Labor Department report showed an unemployment rate of 8.1 percent. In February joblessness was 7.7 percent. Employment rose 236,000 in February after a revised 119,000 gain the prior month that was smaller than first estimated, Labor Department figures showed March 8.

Kocherlakota, 49, spoke today to the Bloomington, Eden Prairie, Edina and Richfield chambers of commerce.

Kocherlakota entered Princeton University in New Jersey at the age of 15 and received a doctorate from the University of Chicago at 23. He was an economics professor at the University of Minnesota before becoming head of the regional bank in October 2009. He was an economist at the bank from 1996 to 1998.

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Federal Open Market Committee may choose not to raise the main interest rate when the jobless rate falls below 6.5 percent.
Wednesday, 27 March 2013 01:44 PM
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