It was just a week ago that the markets were worried that the
Federal Reserve could taper, or gradually reduce, its stimulative large-scale asset purchase program.
Today, Minneapolis Fed President Narayana Kocherlakota, is suggesting we may need even more stimulus to get unemployment down and the economy humming.
The dovish Fed official employs buzz phrases like “whatever it takes,” and he even suggests the Fed should ignore warnings of asset bubbles as it stimulates.
From his speech today (emphasis added):
…But, as Paul Volcker said in his 1979 speech, it is not enough to formulate or communicate a goal. The Committee has to stick to its formulated approach — that is, it must do whatever it takes to achieve its communicated goal. In the early 1980s, doing whatever it took meant being willing to keep money tight, even though interest rates and the unemployment rate rose to unusual heights. By doing whatever it took to achieve its goal, despite these short-term costs, the FOMC was able to bring down inflation and inflation expectations.
Doing whatever it takes in the next few years will mean something different. It will mean that the FOMC is willing to continue to use the unconventional monetary policy tools that it has employed in the past few years. Indeed, it will mean that the FOMC is willing to use any of its congressionally authorised tools to achieve the goal of higher employment, no matter how unconventional those tools might be. Moreover, doing whatever it takes will mean keeping a historically unusual amount of monetary stimulus in place — and possibly providing more stimulus — even as:
- Interest rates remain near historic lows.
- Economic growth rises above historical averages.
- Per capita employment begins to rise appreciably.
- Asset prices rise to unusually high levels, leading to concerns about “bubbles.”
- The medium-term inflation outlook rises temporarily above 2 per cent.
It may not be easy to stick to this path. But I anticipate that the benefits of doing so, in terms of employment gains, will be significant…
As one of the more dovish members of the Fed, Kocherlakota’s remarks do not reflect the consensus.
Read the whole speech at MinneapolisFed.org.