In a column on Bloomberg View Monday, the former Minneapolis Federal Reserve president said that instead of considering raising interest rates at their July meeting, the FOMC should cut rates instead. The reason? Brexit.
“Britain’s vote to exit the European Union and the reaction in global markets offer important lessons for the Federal Reserve,” wrote Kocherlakota. “It should be easing policy in the near term.”
Kocherlakota said that the UK’s decision to leave the European Union means that uncertainty will reign over markets for the foreseeable future. This can weigh on economic activity and employment, thus, the Fed should cut rates in order to support the labour market and shaky economy.
“Given the prospect of shocks that are hard to offset, the Fed should be easing monetary policy to make the U.S. economy as healthy as possible,” he wrote.
Kocherlakota said that Brexit just exemplifies the economic uncertainty that is roiling markets around the world. In addition to the vote, the slowing growth of China and debt in emerging markets are serious unknowns that could produce negative outcomes for the US economy.
Add all of these worries up, and the Fed needs to be as supportive as possible to the economy.
“The long-run fed funds rate will only be much higher than its current level if the Fed is clearly seen to be willing and able to reduce the effect of any downside risks to prices and employment,” said Kocherlakota.
“It can best display that commitment by cutting interest rates in July, not leaving them unchanged or raising them.”
While he acknowledged there were worries that inflation could get out of hand if the Fed leaves policy too loose for too long, Kocherlakota argues that the ability of the FOMC to reign it in with rapid hikes was enough to assuage the concern.
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