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Minneapolis Fed President Narayana Kocherlakota, speaking at the
Bank of Korea in Seoul, stopped short of advocating the move,
saying that the Fed would need to weigh the benefits against
costs including a possible hit to Fed credibility if it is seen
as simply moving its own goal posts.
But the comments show Kocherlakota continues to marshal new
arguments for keeping interest rates low even as most of his
colleagues see the time for a rate increase as approaching.
Another dovish Fed policymaker, Boston Fed chief Eric Rosengren,
has also recently raised the notion of boosting the Fed's
inflation target.
Most of Kocherlakota's speech Thursday reprised remarks made in
Frankfurt last month in which he argued that a drop in the
long-run interest-rate level consistent with full employment and
stable prices is making the Fed's job harder.
But on Thursday he also warned that the decline in the so-called
long-run neutral real interest rate also imperils financial
stability, because it forces the Fed to keep rates lower for
longer in order to achieve its goals, increasing the likelihood
that investors will make risky trades to boost their returns.
Raising the Fed's inflation target could mitigate those problems
by lifting the longer-run fed funds rate.
"This would offset the impact of a decline in the long-run
neutral real rate of interest by giving the (Fed) more 'policy
space' to respond to adverse shocks," Kocherlakota said.
Kocherlakota, who will leave the Fed at the end of the year to
return to academia, has for years tried to convince his
colleagues that the Fed needs to hold interest rates near zero
until well into 2016. Doing so, he has said, would help boost
inflation, now well below the Fed's 2-percent target, back to
healthier levels.
Many Fed officials, however, are becoming convinced that the
economy is getting strong enough to withstand a rate hike in
coming months..
(Reporting by Ann Saphir; Editing by Andrea Ricci)
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