Kocherlakota Says Fed Hasn’t Cut Real Interest Rate Enough

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the Fed’s record stimulus hasn’t pushed down the real interest rate enough to meet its mandate to achieve price stability and full employment.

“The outlook for prices and employment is that they will remain too low over the next two to three years,” Kocherlakota said today during a panel discussion in Chicago. “Despite its actions, the FOMC has still not lowered the real interest rate sufficiently,” he said, referring to the Federal Open Market Committee.

Aiming to spur economic growth, the FOMC pledged on May 1 to keep buying $85 billion each month in bonds and to hold the benchmark interest rate near zero. Kocherlakota, who doesn’t vote on the committee this year, has called for stepping up stimulus to boost the expansion.

One way to fuel growth is to offer more guidance on the Fed’s policy intentions, the Minneapolis Fed chief said. While the FOMC has signaled “it’s going to be pretty hard” to raise rates as long as the jobless rate is above 6.5 percent, officials have been less clear about what they will do once unemployment falls to that threshold, he said.

U.S. stocks rose today after reports showed consumer sentiment improved. The Standard & Poor’s 500 Index increased 0.9 percent to 1,664.65 as of 3:20 p.m. in New York.

Kocherlakota said low interest rates may lead to volatility in asset prices, which may “pose macroeconomic risks.” While the Fed could tighten policy to mitigate those risks, it must also consider the costs of doing so for employment and inflation, he said.

“The gains from tightening related to improving financial stability are both speculative and slight,” he said. “Financial stability considerations provide little support for reducing accommodation at this time.”

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