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 "Interest rates are not low enough," Minneapolis Federal Reserve
President Narayana Kocherlakota said at a Town Hall meeting in
Montana, citing subdued inflation and "unacceptably high"
unemployment as evidence.
The fact that the Fed has not been able to achieve its twin
objectives of maximum employment and 2-percent inflation suggests
the need for lower rates, he said.
"Given where we are with inflation, I think that it’s challenging to
know why we are removing stimulus from the economy at the rate that
we are," he said. "I think that is a challenging question, and I
don’t really have a good answer."
The Fed has kept short-term interest rates near zero since December
2008 in an effort to pull the economy from its worst recession in
decades. It has also bought trillions of dollars of Treasuries and
housing-backed securities to push borrowing costs down further and
spark investment and hiring.
But with the unemployment rate, at 6.2 percent, well below its
recession-era peak of 10 percent, and inflation showing no signs of
falling further, the Fed has begun to trim its monthly bond
purchases, aiming to end them completely by October.
Kocherlakota is a voter on the Fed's policy-setting panel this year
and has argued forcefully that the Fed should do more to try to
bring inflation up and unemployment down. Still, he has voted all
but once with the majority at the Fed to continue to trim the
bond-buying program.
On Thursday, Kocherlakota forecast inflation to stay below the Fed's
2-percent target until 2018, a sign that the country is not taking
full advantage of its resources.
It is a very different picture from the too-high inflation that
plagued policymakers 40 years ago, Kocherlakota said at the town
hall, held at Carroll College in Helena.
Back then, U.S. President Gerald R. Ford launched an anti-inflation
campaign and commissioned Meredith Willson to write a song to go
with it. "Who needs inflation? Not this nation," Kocherlakota quoted
from the song, to chuckles in the largely student audience.
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"Mr. Willson’s pithy characterization was spot on in 1974,"
Kocherlakota said. "But 40 years later, I would suggest that it’s
exactly backward. Right now, this nation needs more inflation."
Some of Kocherlakota's colleagues have begun to worry publicly that
the Fed's super-easy monetary policy could fuel inflation if the
central bank does not begin to raise rates soon. Kocherlakota
disagreed.
"I don’t think we’ve been hitting maximum employment successfully,
and we haven't been hitting 2-percent inflation," he said. "Both of
those seem to call for lower interest rates... the problem is not
that they are too low."
(Reporting by Nathan Kavanagh; Writing by Ann Saphir; Editing by
Cynthia Osterman, Lisa Shumaker and Ken Wills)
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