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Fed’s Kocherlakota Says QE Buffers Against Shutdown Impact
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Fed’s $85 billion in monthly bond purchases help buffer the U.S. economy against the partial shutdown of government, and growth hasn’t been “good enough” to warrant a pullback in record stimulus.
“It’s hard to justify reducing the pace of purchases” if the Fed truly were committed to doing everything it can to support the jobs recovery, Kocherlakota said today in an interview in Minneapolis. “Our accommodative policy is a useful buffer against these kinds of fiscal disturbances,” while “they can’t offset it completely,” said Kocherlakota, a backer of bond buying by the Fed who votes on policy next year.
The Federal Open Market Committee last month unexpectedly refrained from tapering monthly asset purchases, citing fiscal policy as a risk to economic growth. Kocherlakota, who will vote on monetary policy in 2014, has become one of the Fed’s most vocal proponents for record easing during the past year.
“Discussing the possibility of reducing purchases because we’re satisfied with the degree of improvement in the labor market,” as the Fed has done since the spring, contradicts a commitment to do everything to reduce unemployment, Kocherlakota, 49, said at the Minneapolis Fed.
“People don’t think of us as being willing to do whatever it takes to meet our long-term goals,” he said, adding a credible pledge to do “whatever it takes” would by itself be “hugely accommodative.”
“Markets would then be anticipating that we would be buying a much larger stock of assets than what they currently anticipate,” he said. “And they would expect the Fed to be keeping rates low for longer.”
The Fed should also reinforce its commitment to reducing unemployment with other policy actions, including a reduction in the interest the central bank pays on excess reserves, he said.
The central bank may want to press on with bond buying even after the economy reaches what it considers full employment, “as long as it remains an effective tool,” he said. “There is a limit out there where the asset purchase program is no longer effective. We’re not there yet.”
U.S. stocks rose today as optimism grew that lawmakers would reach a deal to end America’s budget standoff. The Standard & Poor’s 500 Index increased 0.7 percent to 1,690.34 at 3:21 p.m. in New York.
Atlanta Fed President Dennis Lockhart said yesterday the central bank’s decision last month not to pare the pace of its bond buying was “wise” given the partial government shutdown that ensued. Richmond Fed President Jeffrey Lacker, who has opposed additional stimulus, said the government suspension won’t have an impact on economic growth for long, and doesn’t alter his view on the need for bond buying.
“The direct effect of the government shutdown is likely to be transitory,” Lacker, who doesn’t vote on policy this year, said to reporters today after a speech in Baltimore. “Whatever it takes out of fourth-quarter growth, there will probably be a matching” increase in first-quarter expansion.
The government closing will probably have only a limited impact on the economy if it remains brief, Kocherlakota said.
A longer suspension of government operations -- possibly three to four weeks -- along with any growing concerns the U.S. may not raise its debt ceiling to avoid default, may prove “problematic” for businesses and households, he said.
A week-long partial shutdown would probably shave 0.1 percentage point from economic growth, according to 40 economists in a Bloomberg survey this week. The world’s largest economy expanded at a 2.5 percent rate in the second quarter.
U.S. growth next year may “accelerate somewhat” to a 2.5 percent to 3 percent rate, and that’s still not “good enough” to reduce unemployment quickly enough, Kocherlakota said in the interview.
“It’s going to take longer” than the middle of 2015 “to get unemployment down to the kind of levels where we should be thinking about raising rates” if the economy unfolds as he’s currently expecting, the district bank chief said.
At the end of 2016, the federal funds rate should still be lower than 2 percent, the median forecast given by policy makers in September, Kocherlakota said.
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