The Federal Reserve is widely expected to start slowing down its stimulus efforts this month, but not all central bank officials are convinced the economy is strong enough without further quantitative easing.
Minneapolis Fed President Narayana Kocherlakota said in a speech that forecasts of continued high unemployment and low inflation imply that the Fed is “failing to provide sufficient stimulus to the economy.”
Speaking in La Crosse, Mich., Wednesday night, Kocherlakota noted that the unemployment rate remains at the high level of 7.4 percent and inflation is running below the Fed’s target of 2 percent – it was 1.4 percent in July by the Dallas Fed’s calculations. Kocherlakota acknowledged that the Fed’s recent efforts to reduce unemployment by buying Treasury bonds on a massive scale have been “historically unprecedented,” but argued that “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.”
Rather than scaling back its $85 billion monthly bond purchases, Kocherlakota said, the Fed’s forecasts of high unemployment and low inflation “suggest that it should be providing more stimulus to the economy, not less.”
Kocherlakota’s call for additional monetary easing is particularly notable because the 49-year-old former University of Minnesota professor was formerly one of the biggest inflation hawks among Fed officials. When he was a voting member of the monetary policy committee in 2011, he twice dissented from Fed statements on the grounds that they were too accommodative. Earlier in 2011, he had suggested raising short-term interest rates above the near-zero target that the Fed set in late 2008 and is still in place today.
Chairman Ben Bernanke, however, eventually changed Kocherlakota’s views on monetary policy with repeated calls and emails, and eventually won his support for the Fed’s later efforts to boost the economy with large-scale bond purchases and promises to keep interest rates low.
Kocherlakota is not currently a voting member of the Fed’s monetary policy committee, although he will be next year (the Fed’s 12 regional bank presidents rotate among five voting spots on the committee). Every president, though, can speak at the meetings. The Fed’s next scheduled meeting is scheduled for Sept. 17-18.