Kocherlakota Says Fed May Need Lower Unemployment Rate Threshold

Minneapolis Federal Reserve President Narayana Kocherlakota said he believes the Fed will have to lower its threshold for the unemployment rate before it begins raising its target interest rate.

“I worry that we’ll come to a point where we’re going to want to do this later anyway -- that is, lower the unemployment threshold -- and we’ll have lost all the stimulus we could have provided in the intervening period by lowering it ahead of time,” Kocherlakota said in a December interview that was posted today on the Minneapolis Fed’s website as part of its annual report.

In December, the Fed said it would hold interest rates near zero as least as long as joblessness remained above a threshold of 6.5 percent on the unemployment rate. The central bank also said it would consider raising rates if the outlook for inflation breached its threshold of 2.5 percent. Kocherlakota said a 5.5 percent goal on the unemployment rate would have been better.

“We have left an opportunity out there for improvement by setting it as high as we did,” Kocherlakota said.

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