Minneapolis Fed Chief Kocherlakota Sees Unemployment Above 7 Percent Until Second Half 2014

Wednesday, 26 Jun 2013 01:56 PM

 

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, who doesn’t vote on monetary policy this year, said he favors continuing bond purchases until unemployment falls below 7 percent, which he doesn’t expect until the second half of next year.

“I’m expecting the unemployment rate to be hitting 7 percent sometime in the second half of 2014,” Kocherlakota said in an interview on CNBC. He backs a strategy of buying assets “at least until” unemployment is below 7 percent.

Chairman Ben S. Bernanke said June 19 the Fed may cut its $85 billion in monthly bond buying this year and end it around mid-2014 if the economy grows in line with the central bank’s forecast.

His comments pushed down stocks and bonds. Since the day before his remarks the Standard & Poor’s 500 Index has fallen 3.9 percent, while the yield on the 10-year Treasury note has risen to an intra-day high of 2.66 percent from 2.19 percent.

Kocherlakota may be more pessimistic about unemployment than many of his colleagues on the Federal Open Market Committee. Bernanke said last week that by mid-2014 unemployment would likely be “in the vicinity of 7 percent.”

The Minneapolis Fed chief has stressed that the Fed still remains accommodative, telling reporters June 24 the central bank should highlight the line from its policy statements that stimulus will persist “for a considerable time” after the end of quantitative easing. “We have to bring that forward and hammer it every time we talk about policy,” he said.

He said the Fed will be “in the business of accommodation long after the asset purchases end.”

2014 Vote

Fed presidents rotate voting on monetary policy and Kocherlakota is next scheduled to vote in 2014 when the FOMC may be considering winding down its bond purchases.

Kocherlakota in 2011 voted against two decisions of the FOMC, opposing actions to add stimulus. He joined in his dissent with Philadelphia Fed President Charles Plosser and the Dallas Fed’s Richard Fisher, two of the most outspoken critics within the Fed of the central bank’s bond purchases.

In May 2012 Kocherlakota said the Fed may need to raise interest rates by the end of 2012. By September, his views changed and he said the central bank was providing insufficient accommodation to push the economy toward recovery.

He attributed his shift to declining inflation and to research that suggested unemployment in the U.S. was driven by economic weakness and not structural changes in the economy.

“Inflation should be something that we’re keeping our eye on,” Kocherlakota said. “We have a 2 percent target and we should defend our target from below as well as above.”

“I do see the low levels right now as being largely transitory,” he added. “I think inflation will come back up.”

Kocherlakota criticized the Fed’s recent communications in a June 24 statement, saying the central bank needs to set clearer guideposts for the outlook for record stimulus and commit to press on with monthly bond purchases at least until unemployment falls below 7 percent.

“The committee’s communications have provided insufficient detail about how its policy strategy will play out when the recovery is more advanced,” he said.

© Copyright 2014 Bloomberg News. All rights reserved.

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