Fed's Kocherlakota Says Economy Needs More Accommodation

Thursday, 05 Sep 2013 07:22 AM

 

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, who has backed the Fed’s $85 billion in monthly bond buying, said the central bank’s outlook for inflation and unemployment calls for more accommodation.

The Federal Open Market Committee’s “own forecasts suggest that it should be providing more stimulus to the economy, not less,” Kocherlakota said in a speech in La Crosse, Wisconsin. He doesn’t vote on monetary policy this year.

The FOMC at a Sept. 17-18 meeting will probably taper its bond buying, according to 65 percent of economists surveyed by Bloomberg last month. Fed Chairman Ben S. Bernanke and his colleagues have pledged for almost a year to press on with purchases until they see substantial improvement in the labor market including unemployment, which was 7.4 percent in July.

“The Committee is failing to provide sufficient stimulus to the economy,” Kocherlakota said, citing the FOMC outlook for inflation and unemployment. FOMC participants in June predicted “that inflation will remain below 2 percent over the medium term and that unemployment will decline only gradually.”

The FOMC has committed to hold its benchmark interest rate near zero as long as the unemployment rate is above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent. Kocherlakota, an early advocate of tying policy to economic indicators, has called on the Fed to step up accommodation by reducing its unemployment threshold to 5.5 percent.

Record Low

While the Fed has pledged to maintain record-low interest rates at least until those economic benchmarks are met, investors still don’t know what the Fed will do after unemployment falls below 6.5 percent, he said in response to an audience question.

“So far, we have not communicated effectively” the Fed’s intentions, he said. “That uncertainty is contributing to some of the upward pressure on interest rates.”

Speculation the Fed will pare its bond purchases has pushed up borrowing costs to two-year highs. The average rate on a 30- year, fixed-rate mortgage has increased to 4.51 percent from a record-low 3.31 percent in November, according to Freddie Mac. The 10-year Treasury yield hit a two-year high of 2.93 percent on Aug. 22.

“The U.S. economy is recovering from the largest adverse shock in 80 years, and a historically unprecedented shock should lead to a historically unprecedented monetary policy response,” Kocherlakota said.

Unorthodox Tools

The FOMC, while deploying unorthodox tools for stimulus, has released forecasts for economic growth that are rosier than Wall Street’s. The median estimate of private forecasters in a Bloomberg survey calls for an expansion of 1.6 percent this year and 2.7 percent next year.

U.S. central bankers predicted in June that gross domestic product will grow 2.3 percent to 2.6 percent this year and 3 percent to 3.5 percent in 2014. During the second quarter, GDP rose at a 2.5 percent annualized rate after 1.1 percent during the first three months of the year.

FOMC forecasts “have tended to be too optimistic,” St. Louis Fed President James Bullard, who votes on policy this year, said in an Aug. 14 speech. “Caution is warranted in taking policy action based on forecasts alone.”

The economy expanded at a “modest to moderate” pace from early July through late August as Americans stepped up spending on cars and housing-related goods, the Fed said. Manufacturing expanded “modestly” and hiring “held steady or increased modestly,’ ’the Fed said in its Beige Book survey, which is based on reports from its 12 districts.

Stocks Rise

The Standard & Poor’s 500 Index advanced Wednesday 0.8 percent to 1,653.08 in New York trading, while the yield on the benchmark 10-year Treasury note increased 0.04 percentage point to 2.9 percent.

The job market has shown some gains this year. While payroll growth in July decreased to 162,000 from 188,000 the previous month, the average over the past six months was 200,000.

Boston Fed president Eric Rosengren and Chicago’s Charles Evans, both voting members of the FOMC this year who have consistently supported increased stimulus, have cited job growth of 200,000 as a benchmark for labor-market improvement.

© Copyright 2014 Bloomberg News. All rights reserved.

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