Kocherlakota: Fed a Long Way From Price Stability Goal

Friday, 15 Aug 2014 11:30 AM

 

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The Federal Reserve won’t reach its target of 2 percent inflation until 2018 because of continued weakness in the job market, said Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.

“The FOMC is still a long way from meeting its targeted goal of price stability,” Kocherlakota said in a speech in Brainerd, Minnesota, referring to the policy-making Federal Open Market Committee.

The Minneapolis Fed chief predicted the unemployment rate would decline to “around 5.7 percent” by the end of this year while cautioning that the “progress in the decline of the unemployment rate masks continued weakness in labor markets.”

The Fed continued to trim its asset-purchase program last month and said disinflation risks had subsided. Fed officials also said that although the unemployment rate had fallen, a range of other indicators show “significant underutilization of labor resources.”

Employers added more than 200,000 jobs for a sixth straight month in July, the longest such period since 1997, a Labor Department report showed. The jobless rate climbed to 6.2 percent as more people entered the labor force in search of work.

Kocherlakota pointed to the share of people between the ages of 25 to 54 without jobs, a number he described as “disturbingly low,” as a sign of labor-market slack. The measure retreated in July from a post-crisis high of 76.7 percent in June and remains well below the previous cycle high of 80.3 percent reached in January 2007.

Part-Timers

Another “especially significant” measure of slack is the “historically high” percentage of workers who would like full- time jobs but can only find part-time work, said Kocherlakota. A broad measure of unemployment that includes people working part- time because they can’t find full-time jobs rose to 12.2 percent in July after declining one percentage point over the first six months of the year.

“If demand were sufficiently high to generate 2 percent inflation, the underutilized resources would be put to work,” Kocherlakota said. “The most important of those resources is the American people. There are many people in this country who want to work more hours, and our society is deprived of their production.”

Kocherlakota advocated a “tailored approach” to supervision and regulation of community banks. He said low earnings and lagging loan growth have raised questions about the cost of regulations put in place since the crisis and suggested all community banks should be exempted from certain regulations.

Moreover, spending less time on supervision of those banks would allow regulators more time to focus on larger, systemically- important banks, he said.

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