Tags: Kocherlakota | Federal Reserve | policy statement | inflation

Kocherlakota: Fed Statement Risks Harmful Inflation Slide

Friday, 19 December 2014 10:44 AM

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. central bank risked damaging its credibility by communicating its intention to shift toward tighter policy amid a subdued outlook for inflation.

“The FOMC’s failure to respond to weak inflation runs the risk of creating a harmful downward slide in inflation and longer-term inflation expectations of the kind that we have seen in Japan and Europe,” Kocherlakota said in a statement. He released the statement to explain his dissent on Dec. 17 from the Federal Open Market Committee’s decision to modify its guidance on the likely future path of short-term interest rates.

The committee replaced guidance in its statement saying rates would stay near zero “for a considerable time” with language saying it would be “patient” in beginning to raise rates.

Kocherlakota said the FOMC should have instead made clear that it would not raise rates “as long as the one-to-two-year-ahead outlook for the inflation rate remains below its target of 2 percent.”

“The FOMC should also make clear that, if this forward guidance were to prove inadequate, it would be willing to use additional tools, such as asset purchases, to bring inflation back to its target,” he said.

The Minneapolis Fed chief’s statement echoed one he released following the FOMC’s Oct. 28-29 meeting, when he dissented from the committee’s decision to end its bond-buying program.

The Fed’s preferred gauge of inflation, based on the price index of personal consumption expenditures, has been below the Fed’s 2 percent target for 30 months, and a measure of expectations for average annual inflation five to ten years ahead derived from Treasury Inflation-Protected Securities maintained by Fed staff has fallen to the lowest level since 2008.

In her press conference following the meeting, Fed Chair Janet Yellen characterized the subdued inflation outlook as “transitory,” owing to the steep decline in commodity prices over the last six months.

“As the effects of these oil-price declines and other transitory factors dissipate, and as resource utilization continues to rise, the committee expects inflation to move gradually back toward its objective,” she said.

Deflation, a prolonged and generalized fall in prices, can harm economic growth by encouraging companies and individuals to delay spending in the expectation that the prices of goods and services will decline further in the future.

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. central bank risked damaging its credibility by communicating its intention to shift toward tighter policy amid a subdued outlook for inflation.
Kocherlakota, Federal Reserve, policy statement, inflation
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2014-44-19
Friday, 19 December 2014 10:44 AM
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