Fed’s Kocherlakota Says U.S. Economy Needs More Stimulus

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, who has backed the Fed’s $85 billion in monthly bond buying, said the central bank’s outlook for inflation and unemployment calls for more accommodation.

The Federal Open Market Committee’s “own forecasts suggest that it should be providing more stimulus to the economy, not less,” Kocherlakota said in a speech yesterday at the University of Wisconsin in La Crosse. He doesn’t vote on monetary policy this year.

The FOMC at a Sept. 17-18 meeting will probably taper its bond buying, according to 65 percent of economists surveyed by Bloomberg last month. Fed Chairman Ben S. Bernanke and his colleagues have pledged for almost a year to press on with purchases until they see substantial improvement in the labor market including unemployment, which was 7.4 percent in July.

The FOMC has also committed to hold the main interest rate near zero as long as the jobless rate is above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent. Kocherlakota, an early advocate of tying policy to economic indicators, has called on the Fed to step up accommodation by reducing its unemployment threshold to 5.5 percent.

While it will take some time for unemployment to ease to 6.5 percent, the Fed should elaborate on what it intends to do after that benchmark is reached, Kocherlakota said today during a separate forum at the university. “We have to do a better job at communicating” the Fed’s intentions, he said.

‘Sufficient Stimulus’

The Fed “is failing to provide sufficient stimulus to the economy,” Kocherlakota said yesterday, citing the FOMC outlook for inflation and unemployment. Committee participants in June predicted “that inflation will remain below 2 percent over the medium term and that unemployment will decline only gradually.”

Speculation the Fed will pare its bond purchases has pushed up borrowing costs. The average rate on a 30-year, fixed-rate mortgage has increased to 4.57 percent from a record-low 3.31 percent in November, according to Freddie Mac. The 10-year Treasury yield today reached a two-year high of 2.96 percent, rising 0.06 percentage point at 10:07 a.m. in New York.

“The U.S. economy is recovering from the largest adverse shock in 80 years, and a historically unprecedented shock should lead to a historically unprecedented monetary policy response,” Kocherlakota said.

Unorthodox Tools

The FOMC, while deploying unorthodox tools for stimulus, has released forecasts for economic growth that are rosier than Wall Street’s. The median estimate of private forecasters in a Bloomberg survey calls for an expansion of 1.6 percent this year and 2.7 percent next year.

U.S. central bankers predicted in June that gross domestic product will grow 2.3 percent to 2.6 percent this year and 3 percent to 3.5 percent in 2014. During the second quarter, GDP rose at a 2.5 percent annualized rate after 1.1 percent during the first three months of the year.

FOMC forecasts “have tended to be too optimistic,” St. Louis Fed President James Bullard, who votes on policy this year, said in an Aug. 14 speech. “Caution is warranted in taking policy action based on forecasts alone.”

The economy expanded at a “modest to moderate” pace from early July through late August as Americans stepped up spending on cars and housing-related goods, the Fed said yesterday. Manufacturing expanded “modestly” and hiring “held steady or increased modestly,” the Fed said in its Beige Book survey, which is based on reports from its 12 districts.

Some Gains

The job market has shown some gains this year. While payroll growth in July decreased to 162,000 from 188,000 the previous month, the average over the past six months was 200,000.

“Clearly, we are getting closer to meeting our test of substantial improvement in the labor market,” San Francisco Fed President John Williams said yesterday in Portland, Oregon.

Boston Fed president Eric Rosengren and Chicago’s Charles Evans, both voting members of the FOMC this year who have consistently supported increased stimulus, have cited job growth of 200,000 as a benchmark for labor-market improvement.

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