MacroScope

From one Fed dove to another: I see your logic

January 16, 2013

Narayana Kocherlakota, the head of the Federal Reserve Bank of Minneapolis, has made a habit of turning economists’ heads. In September, the policymaker formerly known as a “hawk” surprised people the world over when he suddenly called on the U.S. central bank to keep interest rates ultra low for years to come. This week, Kocherlakota arguably went a step further into “dovish” territory, saying the Fed needs to ease policy even more. He wants the Fed to pledge to keep rates at rock bottom until the U.S. unemployment rate falls to at least 5.5 percent, from 7.8 percent currently – despite the fact that, just last month, the central bank decided to target 6.5 percent unemployment as its new rates threshold.

Kocherlakota’s bold policy stance is probably even more dovish – ie. ┬ámore willing to unleash whatever policies are needed to get Americans back to work – than even those of Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren, until now considered the stanchest doves of the central bank”s 19 policymakers.

So in an interview on Tuesday, Reuters asked Rosengren what he thought of Kocherlakota’s plan. Here’s what he had to say:

There is a logic to saying you want to keep pushing the economy as long as the inflation rate is below your 2 percent target. I think the logic of what President Kocherlakota has highlighted a couple times is that the inflation rate has been well below our 2 percent target for PCE (Personal Consumption Expenditure) – we’re currently at 1.4 percent, 1.5 percent for core – and given that we’re missing on the target, that gives us room to promote more rapid growth overall.

It should be noted that Rosengren backs the Fed’s 6.5-percent unemployment threshold, leaving, as he says, lots of room to promote more rapid growth. But who knows – maybe he can be convinced to look even lower?

 

-Ann Saphir contributed to this post

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