Ending the Federal Reserve’s quantitative easing program while inflation remains low threatens the central bank’s credibility, Narayana Kocherlakota said Friday in an explanation of his “no” vote on the Fed’s policy decision Wednesday.
The Federal Reserve Bank of Minneapolis president said in a note published on the regional bank’s site that “the credibility of central bank inflation targets cannot be taken for granted. Rather, central banks need to take actions on an ongoing basis to ensure that inflation stays at target.”
There is no evidence that inflation is headed up to the Fed’s 2 percent goal and it’s even “arguably worse,” Kocherlakota said.
Most measures of inflation showed price gains accelerating toward or above 2 percent early in the summer, but have since fallen to about 1.7 percent annually.
The Bureau of Economic Analysis reported Friday morning that the Fed’s preferred inflation measure, the Personal Consumption Expenditures price index with energy and food prices stripped out, stood at 1.5 percent annually in September, unchanged for five months in a row.
Kocherlakota said that in light of the inflation data, the Fed should not have phased out the last $15 billion of its two-year program of monthly Treasury and mortgage-backed securities purchases.
Alternatively, he said, the Fed could have committed to short-term interest rates near zero until at least two-year expectations for inflation had risen back to 2 percent.
The statement released Wednesday that Fed Chairwoman Janet Yellen and the other members of the committee approved called for interest rates to remain at zero for a “considerable time,” and said the decision to raise rates would depend on unemployment continuing to fall as well as inflation continuing to rise toward 2 percent.
Kocherlakota is now known as perhaps the most “dovish” member of the Fed. But when he became the Minneapolis bank president in 2009, he was thought to be on the opposite end of the spectrum.
In his last rotation on the Fed’s monetary policy committee in 2011, Kocherlakota dissented from the Ben Bernanke-led committee’s decision to promise near-zero interest rates through 2013, pushing for earlier rate increases.
But Bernanke ultimately won over Kocherlakota’s support for the most recent round of bond purchases in a series of conversations and emails leading up to its introduction in late 2012.
