Tags: federal reserve | guidance | policy | Narayana Kocherlakota

Fed's Kocherlakota: New Guidance Fosters Policy Uncertainty

Friday, 21 March 2014 09:34 AM

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, who dissented from this week’s decision on monetary policy, said the central bank’s new guidance about its policy intentions risks holding back economic growth by fostering uncertainty.

The Federal Open Market Committee’s omission of quantitative benchmarks to guide changes in interest rates creates “uncertainty about the extent to which the Committee is willing to use monetary stimulus to foster faster growth,” Kocherlakota said in a statement released Friday. “This uncertainty is a drag on economic activity.”

The FOMC this week scrapped a pledge to keep its benchmark interest rate low as long as unemployment is above 6.5 percent, saying it will instead assess “a wide range of information” before beginning to tighten policy.

With unemployment near the threshold at 6.7 percent in February, the committee decided to update the guidance “to better reflect conditions as they now stand and are likely to evolve,” Chair Janet Yellen said in a press conference after the decision.

Instead of discarding this pledge, policy makers should have lowered the joblessness threshold to 5.5 percent, Kocherlakota said.

Alternative Guidance

“This alternative guidance communicates the Committee’s willingness to use monetary policy tools to push inflation back up to 2 percent,” said Kocherlakota, who was the only policy maker to dissent from the March 19 statement.

The Minneapolis Fed chief also said the central bank should condition its interest-rate commitment to a medium-term outlook of inflation below 2.25 percent and expectations that risks to financial stability “remain well-contained.”

Kocherlakota said the Fed’s March 19 statement also fails to signal “purposeful steps” being taken to increase an inflation rate that has continued to track below the bank’s 2 percent target. An index of inflation watched by the Fed rose 1.2 percent in January from a year earlier.

“The absence of this kind of communication weakens the credibility of the Committee’s inflation target, by suggesting that the Committee views persistently sub-2-percent inflation as an acceptable outcome,” he said.

Kocherlakota has been urging his colleagues to signal a stronger commitment to easy policy, repeatedly saying the Fed must do “whatever it takes” to support a job market that’s healing too slowly.

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, who dissented from this week's decision on monetary policy, said the central bank's new guidance about its policy intentions risks holding back economic growth by fostering uncertainty.The Federal Open...
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2014-34-21
Friday, 21 March 2014 09:34 AM
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