This is dovish.
In a speech before the Bismarck-Mandan Chamber of Commerce on Tuesday, Minneapolis Fed president Narayana Kocherlakota said that it will probably be appropriate for the Fed to wait until the second half of 2016 to raise interest rates for the first time.
Kocherlakota, it is important to note, is not a member of the FOMC and will be stepping down as president of the Minneapolis Federal Reserve when his term expires in 2016.
The main thrust of Kocherlakota’s argument on why the Fed ought to be extraordinarily patient in raising rates is inflation and the employment outlook.
The FOMC is charged with making monetary policy so as to promote maximum employment and price stability. There is no tension between these two objectives at the current time. I expect that it will take several years for employment to return to its maximal level. I expect that it will take several years for inflation to return to target. The FOMC can best facilitate its pursuit of both mandates by forgoing any near-term reduction in the level of monetary accommodation.
Kocherlakota also spends a chunk of his speech addressing concerns raised by some about financial stability, and that keeping interest rates near zero is exacerbating an already unstable financial system.
To these concerns, Kocherlakota said:
It is thought by some that raising interest rates could modulate this kind of behaviour and these kinds of vulnerabilities. The good news is that Federal Reserve staff carefully monitors the financial system for exactly these kinds of vulnerabilities. I see little evidence in their analysis to suggest that a monetary policymaker should see financial stability risks as being in any way material. Capital and liquidity are high in the banking sector. Maturity transformation remains modest.
And as for his rate call:
To be more specific, based on my current assessment of the future evolution of the economy, I anticipate that it would be appropriate for the FOMC to defer the initial interest rate increase until the second half of 2016. It would then be appropriate under my outlook for the FOMC to raise the target range for the fed funds rate thereafter to about 2 percentage points by the end of 2017. This would be slower than the last tightening of monetary policy in 2004 to 2006.
And so while Kocherlakota’s thoughts on monetary policy are important to note, he does not have the same kind of impact on monetary policy that voting FOMC members like New York Fed president Bill Dudley, Chicago Fed president Charles Evans, and of course Fed chair Janet Yellen.
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