(James Saft is a Reuters columnist. The opinions expressed are his own.)
By James Saft
(Reuters) – Don’t say you weren’t warned.
The next crisis is coming, driven on by Federal Reserve policy which in seeking to keep inflation and employment on target will also breed financial instability.
Don’t take my word for it – this is all straight from Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, who last week laid out his thinking on why low rates will be needed for years to come and what the side-effects will be.
“I’ve suggested that it is likely that, for a number of years to come, the Federal Open Market Committee will only achieve its dual mandate of maximum employment and price stability if it keeps real interest rates unusually low,” Kocherlakota said in a speech in New York.
“I’ve also argued that when real interest rates are low, we are likely to see financial market outcomes that signify instability. It follows that, for a considerable period of time, the FOMC may only be able to achieve its macroeconomic objectives in association with signs of instability in financial markets.”
In Kocherlakota’s view, raising rates would definitely drive both prices and employment further down – and away from the Fed’s mandate. Higher rates would also reduce the risk of a financial crisis, he said, one which could hurt employment and price stability even more. (here)