–Confident US Economy Will Improve at Some Point

By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve’s policymaking Federal Open
Market Committee should go beyond deciding whether to buy more assets or
keep interest rates low for longer at each meeting and release an
explicit plan laying out the path of future monetary policy, Minneapolis
Federal Reserve Bank President Narayana Kocherlakota said Tuesday.

Speaking to the Winnipeg, Canada branch of the Chartered Financial
Analyst Institute, Kocherlakota’s prepared remarks echoed his November 8
speech in South Dakota.

Kocherlakota said while banks are keeping nearly $1.6 trillion in
excess reserves at the Fed because there are few good lending
opportunities, “I’m confident, though, that at some point in the future,
the economy will improve and banks will once again have good lending
opportunities.”

But he said this “need not trigger inflation now or in the future,
because the Federal Reserve can now pay interest on bank reserves.”

On the other hand, the national unemployment rate at 9.0% “remains
disturbingly high,” he said, but this is a problem for which the FOMC
still has the tools, and choices, to address.

But rather than limiting itself to deciding if another program of
quantitative easing program is needed or whether to extend the time
period for exceptionally low rates, Kocherlakota again urged the FOMC to
provide a public contingency plan.

“That is, provide clear guidance on how it will respond to a
variety of relevant scenarios,” he said.

“For example, the Committee recently projected that in 2011, core
inflation will be 1.9% and that it will fall back in 2012 and 2013 to
around 1.7%. Suppose hypothetically that core inflation, and the outlook
for core inflation, has risen to 3% by the end of 2013, while
unemployment has fallen to between 8% and 8.5%. A public contingency
plan would allow the public to know what the Committee intends to do in
that eventuality.”

Kocherlakota argued that formulating an explicit contingency plan
would make FOMC actions more consistent with macroeconomic data.
Secondly, he said a public plan would help reduce the level of “policy
uncertainty” being created by the Fed.

Despite his arguments, he acknowledged that conditions could occur
in future that would force the Fed to deviate from a chosen plan.

“However, having a public plan, and couching its decisions against
the backdrop of that plan, will enhance Federal Reserve transparency,
credibility, accountability and consistency,” he said.

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

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