Minneapolis Fed President Narayana Kocherlakota is
speaking at the University of Wisconsin this evening.
Kocherlakota, one of the more dovish members of the Federal Open Market Committee (FOMC), struck a pretty dovish chord in his opening remarks.
Here’s the important excerpt (emphasis added):
…With that context, let me turn to the current stance of monetary policy. Six years ago, in the fall of 2007, the Federal Reserve had under $US900 billion of assets, mostly in the form of short- term Treasuries. It was targeting a fed funds rate — the short-term interbank lending rate — of just under 5 per cent. Six years later, the Federal Reserve owns well over $US3 trillion of assets, mostly in the form of long-term government-issued or government-backed securities. It plans to buy still more over the remainder of 2013. It has also been targeting a fed funds rate of under a quarter per cent for nearly five years. It anticipates continuing to do so at least until the unemployment rate, currently at 7.4 per cent, falls below 6.5 per cent, as long as inflation remains under control.
These policy actions — buying long-term assets and keeping short-term interest rates low — are designed to stimulate spending by households and firms, and thereby push up on both prices and employment. Is the FOMC’s policy stance providing an appropriate amount of stimulus to the economy? To answer this question, we have to compare the economy’s performance relative to the FOMC’s goals of price stability and maximum employment. In July, the unemployment rate was 7.4 per cent — much higher than the FOMC’s current assessment of the longer-run normal unemployment rate, which is between 5.2 per cent and 6 per cent. At the same time, personal consumption expenditure inflation — including food and energy — is running well below the Fed’s target of 2 per cent.
But current monetary policy is typically thought to affect the macroeconomy with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy in terms of what it implies for the future evolution of inflation and employment. Along those lines, after its most recent meeting, the FOMC announced that it expects that inflation will remain below 2 per cent over the medium term and that unemployment will decline only gradually. These forecasts imply that the Committee is failing to provide sufficient stimulus to the economy.
The FOMC reconvenes later this month to discuss and set monetary policy. Economists expect the Fed to begin tapering its monthly purchases of $US85 billion worth of bonds.
But from the sound of tonight’s Fedspeak, one FOMC member might not be ready to take the Fed’s foot off of the gas.