THE WALL STREET JOURNAL.
WSJ.com
September 22,2014,7:30 PM ET
Fed Must Be Cautious About Rate Increases With Inflation Low, Kocherlakota Says
By Podro Nicolaci da Costa and Cheryl L. Reed
The Federal Reserve must not be overly confident that inflation will return to its 2% target and be extra careful about raising interest rates given the economy's disappointing performance,Minneapolis Fed President Narayana Kocherlakota said Monday.
'We want to make sure inflationis on the path back to 2%," he told the Economic Club of Marquette County. "We don't want to create more risk. You have to be very cautious about removing stimulus."
Mr. Kocherlakota, a voter this year on the Federal Open Market Committee and arguably the committee's strongest advocate for continued support for the economy, offered several prescriptions for getting growth and jobs back to full health more quickly.
First, Fed officials should be more proactive about ensuring U.S.inflation hits its 2% target,since undershooting that goal as the central bank has been doing recently endangers economic growth
They could do this by making clear their 2% inflation goalis "symmetric" in that policy makers will be equally preoccupied about falling short of target as they are about exceeding it. Otherwise, Mr. Kocherlakota warns, the public and markets will no longer believe the Fed's target is credible.
"Inflation persistently below the 2% target could create doubts in households and businesses about whether the FOMC is truly aiming for 2% inflation, or some lower number," he said. "This kind of unmooring of inflation expectations would reduce the effectiveness of monetary policy as a mitigant against adverse macroeconomic shocks."
Mr. Kocherlakota also said the Fed could help make monetary policy more transparent by describing in greater detail how considerations about financial stability might influence the outlook for interest rates. Another possibility wou ld be for the Fed to commit to achievingits inflation target within a two-year time horizon.
"The lack of a public timeline for a goal can sometimes lead to a lack of urgency in the pursuit of that goal," he said."I believe that, if the FOMC publicly articulated a reasonable time benchmark for achieving the inflation goal, the Committee would be led to pursue its inflation target with even more alacrity."
Mr. Kocherlakota said theidea of targeting the overall price level rather than the rate of inflation "deserves further study." Under such a system,the Fed would effectively overshoot its inflation goal for a time to make up for earlier misses to the downside.
The Fed has kept interest rates at effectively zero since December 2008. It has also bought more than $3 trill on in government and mortgage bonds in an effort to revive frozen credit markets, and later to bolster a weak recovery and employment.
The economic recovery has been sustained for over five years, but growth has hovered at around a still-soft 2%, and has arrived in fits and starts. The unemployment rate has come down to 6.1% from a crisis peak of 10%,but remains well above levels Fed officials consider normal. Tlhe Fed's preferred inflation measure rose 1.6% in the year to July.
'We don't want to be overly sanguine about the inflation situation. When interest rates are as low as they are we need to be cautious about raising interest rates," Mr. Kocherlakota said. "Our goal is to bring inflation to 2% to avoid the European and Japanese situations."
WSJ.com
September 22,2014,7:30 PM ET
Fed Must Be Cautious About Rate Increases With Inflation Low, Kocherlakota Says
By Podro Nicolaci da Costa and Cheryl L. Reed
The Federal Reserve must not be overly confident that inflation will return to its 2% target and be extra careful about raising interest rates given the economy's disappointing performance,Minneapolis Fed President Narayana Kocherlakota said Monday.
'We want to make sure inflationis on the path back to 2%," he told the Economic Club of Marquette County. "We don't want to create more risk. You have to be very cautious about removing stimulus."
Mr. Kocherlakota, a voter this year on the Federal Open Market Committee and arguably the committee's strongest advocate for continued support for the economy, offered several prescriptions for getting growth and jobs back to full health more quickly.
First, Fed officials should be more proactive about ensuring U.S.inflation hits its 2% target,since undershooting that goal as the central bank has been doing recently endangers economic growth
They could do this by making clear their 2% inflation goalis "symmetric" in that policy makers will be equally preoccupied about falling short of target as they are about exceeding it. Otherwise, Mr. Kocherlakota warns, the public and markets will no longer believe the Fed's target is credible.
"Inflation persistently below the 2% target could create doubts in households and businesses about whether the FOMC is truly aiming for 2% inflation, or some lower number," he said. "This kind of unmooring of inflation expectations would reduce the effectiveness of monetary policy as a mitigant against adverse macroeconomic shocks."
Mr. Kocherlakota also said the Fed could help make monetary policy more transparent by describing in greater detail how considerations about financial stability might influence the outlook for interest rates. Another possibility wou ld be for the Fed to commit to achievingits inflation target within a two-year time horizon.
"The lack of a public timeline for a goal can sometimes lead to a lack of urgency in the pursuit of that goal," he said."I believe that, if the FOMC publicly articulated a reasonable time benchmark for achieving the inflation goal, the Committee would be led to pursue its inflation target with even more alacrity."
Mr. Kocherlakota said theidea of targeting the overall price level rather than the rate of inflation "deserves further study." Under such a system,the Fed would effectively overshoot its inflation goal for a time to make up for earlier misses to the downside.
The Fed has kept interest rates at effectively zero since December 2008. It has also bought more than $3 trill on in government and mortgage bonds in an effort to revive frozen credit markets, and later to bolster a weak recovery and employment.
The economic recovery has been sustained for over five years, but growth has hovered at around a still-soft 2%, and has arrived in fits and starts. The unemployment rate has come down to 6.1% from a crisis peak of 10%,but remains well above levels Fed officials consider normal. Tlhe Fed's preferred inflation measure rose 1.6% in the year to July.
'We don't want to be overly sanguine about the inflation situation. When interest rates are as low as they are we need to be cautious about raising interest rates," Mr. Kocherlakota said. "Our goal is to bring inflation to 2% to avoid the European and Japanese situations."
