-No Tension Between FOMC Jobs, Price Stability Mandate Until Unemployment
Much Lower

-Can Raise Fed Funds Rate If Medium Term Inflation Outlook Exceeds 2.25%

By Brai Odion-Esene

WASHINGTON (MNI) – Minneapolis Federal Reserve Bank President Narayana
Kocherlakota Wednesday defended his proposal for the central bank to keep
monetary policy accommodative until unemployment falls below 5.5% — so long as
inflation remains stable — arguing that it would promote a quicker recovery.

The Fed’s policymaking Federal Open Market Committee does not see any
tension between its maximum employment and price stability mandates right now,
Kocherlakota said in remarks prepared for a business luncheon in Great Falls,
Montana.

“And its long-run unemployment forecasts suggest that it does not
anticipate any tension between the two mandates until the unemployment rate is
considerably lower,” he added. Kocherlakota will not be a voter on the FOMC
until 2014.

Kocherlakota’s proposed ‘liftoff plan’, first unveiled in a Sept. 20 speech
in Ironwood, Michigan, says that “As long as the FOMC is continuing to satisfy
its price stability mandate, it should keep the fed funds rate extraordinarily
low until the unemployment rate has fallen below 5.5%.”

While some Fed officials have urged the central bank to tolerate higher
inflation to stimulate the economy, Kocherlakota sais his plan maintains price
stability as a “cornerstone” while also promoting a quicker recovery.

“The plan commits to keeping the fed funds rate extraordinarily low until
the unemployment rate is much nearer historical norms, as long as inflation
remains under control,” he said. “With that commitment, households can
anticipate that the unemployment rate will fall more quickly, meaning more job
security and more jobs available for those who are looking … . That will drive
up economic activity.”

Kocherlakota assured that his plan comes with an “escape clause” — it
allows the FOMC to raise the fed funds rate if long-term inflation expectations
deviate too much from historical norms, or if the medium-term outlook for the
inflation rate ever exceeds 2.25%.

“In this fashion, this plan explicitly maintains price stability as an
objective while also promoting a more robust recovery,” he said.

Kocherlakota noted that the FOMC currently projects that a long-run
employment rate less than 6% will be consistent with its 2% inflation target,
and that these projections, and the impact unemployment usually has on the
medium-term inflation outlook, the inflation rate unlikely to be above 2.25% in
the medium term when the unemployment rate is above 5.5%.

“The liftoff plan in this speech essentially says that as long as the
Committee continues to perceive no tension between its mandates, it should not
begin to raise the fed funds rate,” he said.

Kocherlakota said he sees the FOMC as satisfying its price stability
mandate so long as its medium-term outlook for inflation is between 1.75% and
2.25%, and longer-term inflation expectations remain stable.

He said allowing the FOMC’s medium-term outlook for inflation to deviate
from 2% by a quarter of a percentage point in either direction “would provide
sufficient flexibility to the Committee, while posing no threat to the
credibility of the long-run target.”

Kocherlakota emphasized that his proposed operational definition of price
stability hinges on the FOMC formulating, and communicating, a quantitative
collective medium term outlook for inflation — as opposed to its current
practice of including qualitative commentary in its end-of-meeting statement.

“Monetary policy would be clearer and more accountable if the Committee
followed the practice of other central banks and reported this kind of
quantitative collective medium-term outlook for inflation at least quarterly,”
he said.

–email: besene@mni-news.com

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