Tags: price-level | Fed | Kocherlakota | employment

Fed's Kocherlakota Says Price-Level Targeting Merits Debate

Wednesday, 21 May 2014 03:19 PM

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said officials should consider temporarily aiming for inflation higher than the Fed’s 2 percent goal to make up for several years of below-target price gains.

The Federal Open Market Committee “could target a slightly higher inflation rate for a few years after 2018 in order to make up for the shortfall in the price level,” Kocherlakota said today in prepared remarks to the Economic Club of Minnesota in Minneapolis. He is a voting member of the FOMC this year.

“This latter policy approach is often termed price level targeting,” he said. “The question of whether to target the inflation rate or the price level should be a subject for serious discussion among central bankers.”

The FOMC has been struggling to bring inflation back closer to 2 percent. Its preferred measure of prices rose only 1.1 percent in March from a year earlier. Kocherlakota, who has been calling for more aggressive stimulus from the Fed, dissented from the March FOMC decision, which he said didn’t signal a strong enough commitment to return inflation to 2 percent.

Wasting Resources

“The undershooting is problematic because it suggests that the American economy is wasting available resources, especially its human resources,” the Minneapolis Fed chief said.

“If the FOMC were to decide today to follow price level targeting, then businesses would anticipate more stimulative future monetary policy and, consequently, higher future demand,” he said.

Kocherlakota added that his intention was to initiate a debate and that he “won’t take a stand today” on whether the Fed’s current approach or the price-level targeting approach is better.

Answering reporters’ questions after his speech, Kocherlakota said the Fed has tools to ensure inflation doesn’t get out of control as the economy picks up.

“We have a wide range of tools that will allow us to dampen inflation pressures when it becomes appropriate to do so,” he said. He said interest rates are likely to remain “unusually low” as the economy moves toward full employment levels, which the Fed defines as a jobless rate of 5.2 percent to 5.6 percent. Unemployment was 6.3 percent in April.

Kocherlakota also said weather wasn’t the sole cause of a slowdown in the housing market early this year. The Fed’s scaling back of bond purchases also played a role, he said.

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said officials should consider temporarily aiming for inflation higher than the Fed's 2 percent goal to make up for several years of below-target price gains.
price-level, Fed, Kocherlakota, employment
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2014-19-21
Wednesday, 21 May 2014 03:19 PM
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