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Kocherlakota Says Fed Policy Too Tight With Low Inflation

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said a subdued outlook for inflation suggests monetary policy is currently “too tight” even after record easing.

“Some observers argue that the Fed has done too much, has been too accommodative,” Kocherlakota said today in a speech in Duluth, Minnesota. “I strongly disagree.”

The Federal Open Market Committee voted last week to continue buying $40 billion in mortgage bonds each month, aiming to reduce 7.8 percent unemployment. The Minneapolis Fed chief has been calling for additional stimulus through a more explicit pledge to keep interest rates near zero.

“The FOMC must offset these adverse shocks by making monetary policy more accommodative,” Kocherlakota said at the University of Minnesota at Duluth, referring to the loss of wealth and jobs since 2007.

After concluding a two-day meeting on Oct. 24, the FOMC said it expects to keep the federal funds rate low through at least mid-2015, repeating a pledge from Sept. 13. Several members would prefer to link policy to specific economic conditions instead of a date, minutes of the September meeting showed.

Kocherlakota is among Fed officials in favor of tying low interest rates to what he calls numerical thresholds. The main rate should stay near zero until unemployment falls below 5.5 percent or the medium-term outlook for inflation rises above 2.25 percent, he said on Oct. 10. Clearer guidance will help persuade households that borrowing costs will remain low and thereby encourage spending, he said.

Safe Assets

Responding to an audience question, the Minneapolis Fed president said interest rates on what are considered comparatively safe assets, such as U.S. Treasuries, are low at the moment because people have doubts about the outlook.

“Going forward, I’m optimistic,” he said, noting recent improvements in consumer confidence. “That is a sign people feel more secure about the future, and you’ll start to see upward pressure on interest rates, and this would be a very good piece of news.”

The U.S. economy will probably grow about 2.5 percent next year, an acceleration from the 2 percent expansion in the third quarter.

U.S. equity markets will reopen tomorrow after the longest weather-related shutdown in more than a century. The Standard & Poor’s 500 Index fell 1.5 percent last week to 1,411.94 as companies from 3M Co. to DuPont Co. reported disappointing quarterly results and forecasts.

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