Former Minneapolis Fed president Narayana Kocherlakota is back at disagreeing with the Fed.
In his latest opinion piece for Bloomberg View, he argued that instead of raising rates, the Fed should be focused on getting people back into the labour force.
After almost a decade of extraordinary measures to encourage spending and heal the economy, the Fed is trying to raise interest rates closer to a level considered ‘normal.’
But even the two rate hikes that the Fed plans this year, by 50 basis points, would be too many for Kocherlakota.
He says the Fed should rather focus on the labour force, with inflation pressures so low.
He pointed to the share of prime-age people (25-54) with a job, which has recovered from a post-crisis low of less than 75%.
According to Kocherlakota, its rise is too slow even though it jumped in recent months, as more people are attracted to the workforce by the near-record level of job openings.
He also cited year-on-year personal consumption expenditures (PCE) excluding food and energy costs, which was below the Fed’s 2% target as at the latest reading.
The core consumer price index, which excludes volatile items, has actually been above 2% and rising since December. But the Fed prefers PCE as a gauge.
Kocherlakota says the “real problem” is that the markets’ 5-year, 5-year forward inflation expectation rate has declined steadily since 2014. But one reason why the rate declined sharply during 2015 was because oil prices did too.
During his time on the Fed’s policy-setting committee (the FOMC), Kocherlakota was a very outspoken dove, in favour of low rates. It was speculated that he was one of two FOMC members who suggested last September that the Fed use negative rates.
So we’ll definitely continue to hear more of Kocherlakota’s dissent from outside the Fed.