–Timing Remains The Question; Now Not The Time To Start

By Brai Odion-Esene

WASHINGTON (MNI) – Minneapolis Federal Reserve Bank President
Narayana Kocherlakota Tuesday laid out the path the Fed is likely to
take when the time comes to exit its massive monetary stimulus programs,
but said that given present inflation and job conditions, he remains
comfortable with the current stance of monetary policy.

Taking questions from the audience following a speech to the
Wisconsin Bankers Association in Madison, Kocherlakota also stressed the
importance of policymakers helping young firms when trying to boost
employment, not just small businesses.

In his prepared remarks, Kocherlakota had declared that from a
macroeconomic standpoint, “2011 will be a better year than 2010.”

Asked how long he thinks the Fed’s large scale assets purchase
program has to last, given that outlook, he said, “I’m very comfortable
with our current monetary policy stance,” including the committment made
by the Fed in November to buy $600 billion worth of longer-term
Treasuries through to the end of the second quarter.

More specifically, Kocherlakota was asked if the Fed had a plan in
place for unwinding the program.

He noted that from as far back as the beginning of 2010, Fed
officials have regularly discussed the nature of any exit. The first
step likely to be taken by the Fed would be “reserve draining.”

This would involve the central bank offering a place for banks to
place their deposits at a slightly higher interest rate, “but in a way
that they would not be able to use those deposits to create money.”

The next step would be to raise interest rates, he said, most
likely using the interest on excess reserves as the main instrument.

This would then be followed by the selling of assets purchased by
the Fed.

“There was a consensus within the Committee that that seemed to be
a good timing,” Kocherlakota said. The question is “when do you start?”

Right now, given ongoing disinflation and the high rate of
unemployment, “this is not the time to start,” he said.

The question of whether the Fed should utilize monetary policy in
tackling artificially-inflated asset prices was again raised, but
Kocherlakota warned the audience that “we should be very cautious about
going down that road.”

Monetary policy is a very blunt instrument, he argued, and it would
be very challenging to try and address any asset prices at the same
time.

On the employment side, Kocherlakota said it is increasingly clear
that the Fed must become much sharper in its distinction between small
firms and young firms.

“Job growth is actually not a function of size, as much it is a
function of youth,” he said. In trying to boost employment levels,
programs targeted towards aiding younger firms are “probably going to be
more effective.”

** Market News International Washington Bureau: 202-371-2121 **

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