Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. central bank risked damaging its credibility by failing to take more purposeful steps to lift inflation to its 2 percent target.
“As we have seen in Japan and may now be seeing in Europe, the credibility of central bank inflation targets cannot be taken for granted,” Kocherlakota said in a recent statement, explaining his dissent on Oct. 29 from the Federal Open Market Committee’s decision to halt bond purchases.
Kocherlakota said the Fed could have continued purchasing bonds at a rate of $15 billion a month and committed itself to keeping interest rates near zero at least until the one- to two- year outlook for inflation rose back to 2 percent.
The changes in dissent over the FOMC’s policy statement signaled a shift on the panel away from a more accomodative monetary policy stance. In September Philadelphia’s Charles Plosser and Dallas President Richard Fisher dissented because they viewed the committee’s statement as too downbeat about strength in the economy. Each had argued that moving too late to raise rates risked excessive inflation or financial instability.
Kocherlakota is more worried about potentially falling prices. Bank of Japan Governor Haruhiko Kuroda today expanded unprecedented monetary stimulus in an attempt to reach that country’s inflation target after battling deflation for years. The European Central Bank is stepping up its purchases of bonds to lift inflation from what President Mario Draghi has called an “excessively low level.”
Deflation can harm economic growth by encouraging companies and individuals to delay spending in the expectation that the prices of goods and services will fall.
Kocherlakota noted that the Fed, when it began tapering its long-term debt purchases in December 2013, said it would monitor inflation for evidence it was returning to the 2 percent target.
“At this stage, I see no such evidence,” he said. “The medium-term outlook for inflation has shown no overall improvement since last December and, indeed, is arguably worse.”
After rising to 1.7 percent in May, the Fed’s preferred measure for inflation has since slowed to 1.4 percent in September.
“Market-based measures of long-term inflation expectations have fallen recently to unusually low levels, a decline that I believe reflects that kind of increased downside risk,” Kocherlakota said.
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