POLITICS: PennAve

Second Federal Reserve member calls for easier money

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Politics,Beltway Confidential,Fiscal Policy,PennAve,Joseph Lawler,Economy,Federal Reserve,Analysis

A second Federal Reserve Bank president has issued a statement calling for easier money and criticizing the Fed’s policy decision last week.

Narayana Kocherlakota, the president of the Minneapolis Fed, released a statement on the bank’s website Monday outlining out his plan to stimulate the economy by reassuring markets that the Fed will keep interest rates low until unemployment hits 5.5 percent. In recent policy statements, the Ben Bernanke-led Fed has identified 6.5 percent unemployment as the key threshold for considering rate hikes.

Kocherlakota, who is not a voting member of the Fed’s monetary policy committee, joins St. Louis Fed President James Bullard in calling for a more dovish Fed. On Friday, Bullard criticized his colleagues on the Federal Open Market Committee for allowing inflation to fall too low and for signaling an end to the central bank’s stimulus purchases while also downgrading their economic projections.

The Fed should clearly signal that it will continue large-scale asset purchases until unemployment has fallen below 7 percent and remove all fears that it will raise rates before the economy is back to normal, Kocherlakota suggested. He also noted that he sees “no contradiction” between his prescription for reassuring markets about the Fed’s stimulus plans and the Fed’s policy statement last week, in a possible attempt to reassure markets worried about the Fed slowing or “tapering” its bond purchases later this year.

Kocherlakota’s comment was released as stock markets continued to tumble and the 10-year U.S. Treasury yield climbed above 2.6 percent, its highest level in over a year, a sign of possible market fears about the Fed withdrawing stimulus. Investors will likely be looking for reassurance from Fed officials in the next few days about the outlook for future bond purchases.

Kocherlakota’s statement marks the completion of a reversal in his attitude toward monetary stimulus: as recently as 2011, he dissented from the Fed’s decision to keep interest rates near zero. The former University of Minnesota economics professor was known as an inflation “hawk” when he became the Minneapolis Fed president in 2009. He adopted a more accommodating stance toward monetary easing, however, after a sustained dialogue with Bernanke and as the recession dragged on.

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