Fed's Kocherlakota: FOMC Missing Inflation and Employment Targets

Federal ReserveNarayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, was speaking on Tuesday in a monetary policy report at the Rochester, Minnesota Chamber of Commerce. The first topic is on the Fed falling short of employment growth objectives. It was also said that the Federal Reserve may not hit its inflation target for years.

On growth, prices and employment, Kocherlakota said:

Raising the level of stimulus puts upward pressure on both inflation and employment. Lowering the level of stimulus puts downward pressure on both inflation and employment. Second, the FOMC's actions only affect inflation and employment with a lag, usually thought to be about one and a half to two years. Finally, over the long run, monetary policy is the prime determinant of the overall rate of inflation in the economy, but many factors beyond monetary policy affect the level of employment.

Kocherlakota said on inflation:

So, inflation has been running too low over the past six-plus years to be consistent with price stability. The good news is that the FOMC does expect inflation to turn back toward 2 percent. However, I expect that return to 2 percent to take a long time — probably on the order of four years. And I'm not the only one forecasting a slow return to 2 percent inflation. Earlier this year, the Congressional Budget Office predicted that inflation will not reach 2 percent until 2019.

On full employment, Kocherlakota said:

I've argued that the low inflation rate is a signal that the FOMC is underperforming with respect to its maximum employment objective. ... In the wake of the recession, the unemployment rate reached a peak of 10 percent in October 2009. ... Since that date — over four years ago! — the unemployment rate has fallen slowly to 6.7 percent. ... The current unemployment rate is also high relative to most forecasts of its expected long-run level. Personally, I expect that, over the long run, the unemployment rate will converge to just over 5 percent. Basically, an unemployment rate of 6.7 percent means that the U.S. labor market is far from healthy.

SEE ALSO: IMF Looks for Better Growth in 2014 to 2015

Filed under: Economy
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