Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Fed should do more to spur economic growth and hiring by pledging to hold the main interest rate near zero until unemployment falls to 5.5 percent.
“Monetary policy is currently not accommodative enough,” Kocherlakota said today in Eden Prairie, Minnesota, delivering a text he gave yesterday. “Historical evidence suggests that, as long as the unemployment rate remains above 5.5 percent, the medium-term inflation outlook will stay close to 2 percent.”
The Fed can increase stimulus by cutting the jobless-rate threshold to 5.5 percent from 6.5 percent, Kocherlakota said. Growth will be “moderate” and inflation will probably be below the Fed’s 2 percent target for the next two years under current policy, he said. Unemployment will likely remain above 7 percent, he said.
Policy makers are turning to communication policies to combat unemployment, which was 7.8 percent in December. The Fed’s Open Market Committee said last month it will keep rates near zero as long as the jobless rate is above 6.5 percent and inflation is forecast to be 2.5 percent or less. They said previously that rates would stay low until at least mid-2015.
Interest rates would remain low even after the Fed slows or halts its $85 billion in monthly asset purchases because it will continue holding those securities, Kocherlakota said in response to questions at an event sponsored by Score, a nonprofit organization that advises small-business owners.
“We could stop buying and we would still be putting downward pressure on interest rates because we are still holding such a large stock of assets,” Kocherlakota said. “It’s really being driven by the stock that we hold, not by the flow.”
When investors begin to anticipate that the Fed will begin selling assets it will push interest rates higher, “but obviously the rapidity of that increase would be shaped by how rapidly we would sell off,” Kocherlakota said. “And we would do it in a responsible, sensible fashion that will not lead to those effects.”
The FOMC last month decided to add $45 billion in monthly purchases of U.S. Treasury notes to its program buying $40 billion of mortgage-backed securities each month. The policy-setting panel set no limit on the size or duration of the bond purchases.
The yield on the benchmark 10-year Treasury note headed for its eighth retreat in the past nine sessions, dropping 0.01 percentage point to 1.82 percent at 11:45 a.m. in New York. The Standard & Poor’s 500 Index was little changed at 1,472.26.
Kocherlakota, 49, said in the text of his speech that gross domestic product probably will expand by about 2.5 percent this year and 3 percent in 2014. Inflation as measured by the personal consumption expenditures index will probably be 1.6 percent this year and 1.9 percent next year, below the Fed’s 2 percent goal, he said.