Fed's Kocherlakota: QE Buffers Against Impact From Shutdown

Friday, 04 Oct 2013 02:10 PM

 

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Fed’s $85 billion in monthly bond purchases help buffer the U.S. economy against the partial shutdown of government and growth hasn’t been “good enough” to warrant a pullback in record stimulus.

“It’s hard to justify reducing the pace of purchases” if the Fed truly were committed to doing everything it can to support the jobs recovery, Kocherlakota said in an interview in Minneapolis.

Fed stimulus will serve as a “useful buffer” against fiscal policy headwinds, said Kocherlakota, a backer of bond buying by the Fed who votes on policy next year.

The Federal Open Market Committee last month unexpectedly refrained from tapering monthly asset purchases, citing fiscal policy as a risk to economic growth. Kocherlakota, who will vote on policy in 2014, has become one of the Fed’s most vocal proponents for record easing during the past year.

“Discussing the possibility of reducing purchases because we’re satisfied with the degree of improvement in the labor market,” as the Fed has done since the spring, contradicts a commitment to do everything to reduce unemployment, Kocherlakota, 49, said at the Minneapolis Fed.

“People don’t think of us as being willing to do whatever it takes to meet our long-term goals,” he said.

The Fed, while signaling a commitment to fight joblessness, should also “live up to” the pledge, he said. One way to do so would be to reduce the interest the central bank pays on excess reserves, he said.

‘Accelerate Somewhat’

U.S. economic growth next year may “accelerate somewhat” to a 2.5 percent to 3 percent rate, and that’s still not “good enough” to reduce unemployment quickly enough, Kocherlakota said.

The partial shutdown of the government, now in its fourth day Friday, will probably have only a limited impact on the economy if it remains brief, he said.

A longer suspension of government operations — possibly three to four weeks — along with any growing concerns the U.S. may not raise its debt ceiling to avoid default, may prove “problematic” for businesses and households, he said.

A week-long partial shutdown would probably shave 0.1 percentage point from economic growth, according to 40 economists in a Bloomberg survey this week. The world’s largest economy expanded at a 2.5 percent rate in the second quarter.

Boston Fed President Eric Rosengren, a consistent backer of record stimulus who votes on policy this year, said this week the Fed refrained from tapering its bond purchases at the last meeting on Sept. 17-18 because growth was lower than forecast and fiscal policy posed a risk to the outlook.

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