In a remarkably aggressive move for a Federal Reserve official, the president of the Federal Reserve Bank of Minneapolis in a speech Thursday urged his colleagues at the central bank to commit to "whatever it takes" to raise employment — including a higher level of inflation.
Minneapolis Fed President Narayana Kocherlakota, who has led the bank since 2009, invoked the iron will of former Fed Chairman Paul Volcker, known for inducing a crippling recession in the early 1980s as a way to finally end sky-high inflation, in making his case for greater monetary stimulus.
In his prepared remarks, Kocherlakota said the Fed now needs a similar level of determination, but for targeting unemployment rather than inflation. He also called the Fed to be "willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be."
Kocherlakota said explicitly that the Fed should keep its stimulus in place even after growth picks up, stock prices soar to the point that markets became worried about bubbles, and inflation expectations rise above the Fed's goal of 2 percent. Core inflation is currently stuck at just 1.2 percent by the measure the Fed's preferred measure, and the Cleveland Fed's latest estimate of expected inflation over the next 10 years is 1.86 percent.
Kocherlakota is not currently a voting member of the Fed's monetary policy committee, although he will be next year. The 12 regional bank presidents rotate to fill four spots on the committee.
Thursday's bold remarks represent yet another step in Kocherlakota's transition from one of the most hawkish members of the Fed to perhaps the most dovish. In 2011, before the Fed had initiated its current program of quantitative easing and promised to keep short-term interest rates near zero, Kocherlakota dissented from Fed decisions, arguing that a hike in interest rates was needed to stave off inflation.
Sustained lobbying by Fed chairman Ben Bernanke, however, prompted Kocherlakota to change his view.
"The Kocherlakota from two years ago would be stunned to hear how the Kocherlakota of today sounds. He's now as 'dovish' as anyone," BTIG chief global strategist Dan Greenhaus tweeted in response to Kocherlakota's speech.
At its meeting last week, the Fed decided to continue its bond-buying program at its current pace despite widespread expectations that it would begin slowing the purchases. Its recent statements have called for the Fed to tolerate inflation of up to 2.5 percent, but Kocherlakota's speech is apparently aimed at increasing the stimulus.