By Steven K. Beckner

(MNI) – Far from being “too easy,” U.S. monetary policy may well be
“too tight,” Minneapolis Federal Reserve Bank President Narayana
Kocherlakota said Tuesday evening.

Kocherlakota, who has adopted a distinctly more “dovish” point of
view in recent months, said he “strongly disagrees” with those who
allege that the Fed has been too “accommodative.”

High unemployment, low inflation and continued “uncertainties”
among firms and households justify aggressive monetary stimulus, he
argued in remarks prepared for delivery at the University of Minnesota
in Duluth.

Last year, Kocherlakota was one of three Federal Reserve Bank
presidents who dissented against easing measures approved by the Fed’s
policymaking Federal Open Market Committee. But he defended the FOMC’s
decision on Sept. 13 to launch a third, open-ended round of asset
purchases to lower long-term interest rates and to delay short-term rate
hikes until at least mid-2015.

And, in an Oct. 10 speech, he proposed holding the funds rate near
zero until the unemployment rate gets down to 5.5% — provided that
inflation is within a quarter point of the Fed’s 2% target, plus or
minus.

Continuing in that vein Tuesday night, Kocherlakota suggested that
a lax monetary policy is warranted by the prevalance of inflation at or
below target.

“Most FOMC participants expect that inflation will remain at or
below 2% over the next one to two years,” he said. “Given how high
unemployment is expected to remain over the next few years, these
inflation forecasts suggest that monetary policy is, if anything, too
tight, not too easy.”

With the Fed having expanded its balance sheet from under $900
billion to nearly $3 trillion since 2007 and planning to buy at least
$40 billion per month until labor markets improve “substantially,”
Kocherlakota noted that some think “the Fed has done too much, has been
too accommodative.”

“I strongly disagree,” he asserted.

Kocherlakota acknowledged the Fed’s actions have been
“unprecedented,” but he said “it is also clear that the economy has been
hit by the worst shock in 80 years.”

“Over the past five years, Americans have lost jobs and a great
deal of wealth,” he said.

And Kocherlakota suggested that deep problems remain for the Fed to
address if it is to fulfill its “dual mandate” of maximum employment and
price stability.

“Relative to 2007, people remain uncertain about future employment
and income,” he said. “Businesses, too, are less certain about future
demand for their goods.”

“These changes and uncertainties make firms and households less
willing to spend, and so push down on both employment and prices,” he
continued. “In order to fulfill its dual mandate … the FOMC must
offset these adverse shocks by making monetary policy more
accommodative.”

Kocherlakota said it is “misleading to assess the FOMC’s actions by
comparing its current choices to policy steps taken over the past 30
years.”

“Instead, we have to assess monetary policy by comparing the
economy’s performance relative to the FOMC’s goals of price stability
and maximum employment,” he said. “In particular, if the FOMC’s policy
is too accommodative, that should manifest itself in inflation above the
Fed’s target of 2%.”

Instead, he said the price index for personal consumption
expenditures (PCE) including food and energy “is running closer to 1.5%
than the Fed’s target of 2%.”

Kocherlakota said it is better to “judge the appropriateness of
current monetary policy” based on “our best possible forecast of
inflation, not current inflation.” But there too, he noted, “most FOMC
participants expect that inflation will remain at or below 2%….”

The Fed has often been accused of helping Wall Street, not Main
Street, but Kocherlakota suggested there is no conflict.

“We should always judge the appropriateness of the Fed’s policies
in terms of how the economy is doing relative to the two Main Street
goals that Congress has set for the FOMC,” he said. “Such a comparison
does not suggest that monetary policy is currently too easy.”

** MNI **

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