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 "If you commit to keeping rates low even as the recovery is
proceeding, even as we continue to recover, I think people have a
sense, the Fed has the recovery's back," Minneapolis Federal Reserve
Bank President Narayana Kocherlakota said at North Dakota State
University. "And that's the message that I think we need to do a
better job of promoting."
If households and businesses believe the Fed is close to raising
rates, they may decide to save rather than to spend, inhibiting
recovery, Kocherlakota said.
But because inflation is so low, he said, the Fed can afford to
remain accommodative even while the recovery strengthens, and it
will likely need to raise rates only gradually when the time comes.
Inflation firmed a bit last month but remains well below the Fed's 2
percent target.
Meanwhile unemployment, at 6.7 percent, remains well above the 5
percent to 6 percent level that most economists consider normal.
Separately, in Bangor, Maine, Boston Fed President Eric Rosengren
floated the idea of promising to keep interest rates near zero until
the U.S. economy is within one year of reaching the central bank's
employment and inflation goals.
"Ideally, forward guidance should, for the time being, remain
qualitative but increasingly be linked to progress in achieving our
dual mandate based on incoming economic data," Rosengren said at
Husson University. "Forward guidance should be consistent with
keeping interest rates at their very low level until we are within
one year of reaching full employment and our 2 percent inflation
target — and the guidance could explicitly state that intention."
Rosengren and Kocherlakota have both supported more aggressive
monetary easing than many of their fellow policymakers.
In December, Rosengren dissented from the majority's decision to
begin to pare back the Fed's massive bond-buying stimulus.
Last month Kocherlakota cast the lone dissent on the Fed's decision
to stop promising low rates as long as unemployment remains above a
set level.
Both policymakers have argued that the Fed should only cautiously
remove accommodation and be patient in raising rates from near zero,
where they have been since late 2008.
Since then, the Fed has tried an array of strategies to telegraph
just how long it will wait to tighten monetary policy, including
tying the ultra-low rates to time periods, and later, to specific
unemployment and inflation thresholds.
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Many investors have grown confused and impatient with the Fed's
varied communications efforts. Last year, for example, talk by Ben
Bernanke, when he was the Fed chairman, of eventually trimming bond
purchases led to a sharp rise in market-wide borrowing costs that
alarmed policymakers.
Last month, Janet Yellen, who took over as Fed chair at the start of
February, rolled out the central bank's latest version of forward
guidance, effectively promising not to raise rates for a
"considerable time" after the Fed halts its bond-buying program; the
Fed has begun to trim its bond purchases and they should end by
December at the latest.
But Yellen sowed more confusion when she then told a press
conference that a "considerable time" means about "six months" or
so.
Kocherlakota suggested on Tuesday that rates should stay lower for
much longer than that, based on the low rate of inflation.
"I can say that I am fully committed to doing whatever it takes to
keep inflation close to 2 percent," Kocherlakota said. "And if we
start to see inflation pressures so that inflation starts to go
above its current 1 percent level and up to closer to 2 (percent) or
rising above 2 (percent), then that's when rates will rise."
But, he also said, inflation looks likely to stay well below 2
percent for several years.
Separately on Tuesday, Yellen said the Fed is considering further
steps to force big banks to hold more capital, and sees a case for
other stability-enhancing measures for more shadowy areas of Wall
Street as well.
She did not address monetary policy in her remarks to a Fed
conference in Atlanta, but is expected to do so when she addresses
the New York Economic Club on Wednesday.
(Writing by Jonathan Spicer and Ann Saphir;
editing by Ken Wills)
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