Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, a voter on policy next year, said the Fed must do “whatever it takes” to strengthen a job market that is healing too slowly.
The Fed should be “willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be,” Kocherlakota said in remarks prepared for a speech in Houghton, Michigan.
“Doing whatever it takes will mean keeping a historically unusual amount of monetary stimulus in place, and possibly providing more stimulus, even as” the medium-term inflation outlook temporarily rises above the Fed’s 2 percent goal and asset prices reach “unusually high levels,” he said.
The Federal Open Market Committee last week unexpectedly refrained from dialing back its $85 billion in monthly bond purchases, saying it was waiting for more signs of sustained economic improvement. Most economists surveyed by Bloomberg on Sept. 18-19, after the FOMC meeting, expect the Fed to wait until a gathering in December to taper bond purchases.
“With low inflation, the FOMC has considerable monetary policy capacity at its disposal with which to address this problem” of a “disturbingly weak” labor market, said Kocherlakota.
“The FOMC’s test today is to figure out how best to deploy this capacity,” he said.
The central bank’s decision to keep policy on hold last week surprised financial markets, sending stocks to record highs and triggering the biggest rally in Treasurys since 2011.
Since then, Fed officials have voiced differing viewpoints, with Dallas’ Richard Fisher and Kansas City’s Esther George saying the FOMC was risking its credibility by not tapering when it had primed the markets for such a move.
New York Fed President William Dudley said Sept. 23 the central bank must “forcefully” push against headwinds in an economy that “still needs the support of a very accommodative monetary policy.”
Fed Governor Jeremy Stein said today in Frankfurt the central bank should press on with accommodation while linking the wind-down of its bond purchases to economic data such as the jobless rate.
“My personal preference would be to make future step-downs a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period,” Stein said. “For example, one could cut monthly purchases by a set amount for each further 10 basis point decline in the unemployment rate.” Ten basis points equal 0.1 percentage point.
The committee’s own outlook for only a “gradual” improvement in the job market amid low inflation should “trigger a decision to provide more monetary stimulus,” Kocherlakota said today.
Fed participants expected 1.1 percent to 1.2 percent inflation for this year, 1.3 percent to 1.8 percent for 2014 and 1.6 percent to 2 percent for 2015, according to central tendency estimates released last week. Prices as measured by the personal consumption expenditures index rose 1.4 percent in July from a year earlier.
The FOMC reiterated last week that it intends to maintain low interest rates as long as unemployment is above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent. Kocherlakota has urged the Fed to change that guidance on interest rates, calling for a lower unemployment rate threshold.
The district bank chief has supported both the beginning of the Fed’s current round of quantitative easing that started in September 2012 as well as the expansion of the program to Treasurys in December.
Data released since the Sept. 17-18 FOMC meeting have underscored a mixed outlook for the U.S. economy. Consumer confidence slid to its weakest level since May, the Conference Board said on Sept. 24.
At the same time, a Labor Department report today showed that the number of Americans filing applications for unemployment benefits unexpectedly declined last week, highlighting further progress in the labor market.
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