–IOER Still A Potential Exit Strategy
By Alyce Andres
CHICAGO (MNI) – Minneapolis Federal Reserve Bank President Narayana
Kocherlakota Thursday said the Fed’s current $600 billion QE plan should
not result in large increases in inflation or the U.S. dollar.
In a question-and-answer session with the audience at a luncheon
for the National Tax Association 103rd Annual Conference on Taxation in
Chicago, Kocherlakota talked down any ill effects of QE2 on both
inflation and the U.S. dollar.
Kocherlakota, who will be a voting member of the FOMC in 2011,
told the audience, “I do think that by creating $600 billion in reserves
and buying Treasury securities, that somehow represents dour pressure on
U.S. dollar. For same reasons, we should not expect big increases in
inflation.”
Also, Kocherlakota told the audience “banks have huge excess
reserves” that are “not being used for economic activity.”
Currently, the Fed pays interest to banks on these excess reserves
held at the Fed.
Altering the level of interest paid on excess reserves (IOER) is
“certainly a policy tool that is on the table and under consideration,”
by the Fed, Kocherlakota told the audience.
Kocherlakota noted changing IOER is “one of the (policy) tools
(Federal Reserve Chairman Ben) Bernanke has mentioned.”
The Fed “could potentially think about changing that rate,”
Kocherlakota said of IOER.
But, Kocherlakota told the audience that in making its most recent
monetary policy decisions, “the basis of the analysis from our staff
work was that QE is more effective.”
Kocherlakota also told the audience that given the “current state
of economy, it seems appropriate to keep rates low as a way to
stimulate the economy.” He likened it to “standard practice” and cited
similar moves by the Bank of Canada.
** Market News International Chicago Bureau: 708-784-1849 **
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