With economists forecasting very low odds of a
crisis anyway, there is "little benefit to reducing or
eliminating the probability of a crisis" with tighter monetary
policy, Narayana Kocherlakota, president of the Minneapolis
Federal Reserve Bank, said in slides prepared for presentation
to a conference in Washington.
If a crisis were to occur, unemployment would probably rise
sharply, he said. But battling such an unlikely event by raising
rates — which would almost surely increase unemployment — is a
losing tradeoff, his reasoning suggests.
Fed officials and economists are increasingly concerned that
keeping rates low for as long as the Fed has — since December
2008 — and buying trillions of dollars of bonds on top of that
to push down borrowing costs could fuel unseen bubbles in the
Some policymakers have even advocated using monetary policy to
head off bubbles, although that does not appear to be the
dominant view at the Fed.
Echoing a more broadly accepted approach, Kocherlakota said that
supervisory tools are the best way to fight the risk of
financial instability posed by low rates.
In his prepared slides, Kocherlakota did not mention his
dissenting vote at the Fed this week, which marks him as one of
the central bank's most dovish policymakers.
(Reporting by Ann Saphir; editing by Leslie Adler)
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