By Michael S. Derby
NEW YORK--The president of Federal Reserve Bank of Minneapolis,
Narayana Kocherlakota, on Wednesday repeated his view that the U.S.
central bank needs to clarify its inflation goals and that any move
to raise interest rates next year would likely be a mistake.
Mr. Kocherlakota, speaking before a local group in Virginia,
Minn., largely was reiterating views made in recent speeches. Mr.
Kocherlakota cast the sole dissenting vote at last week's
monetary-policy meeting, believing the Fed actions that are
preparing the way for rate rises will make it harder to achieve its
2% inflation target.
Most Fed officials expect the first boost in rates from current
near-zero levels will come some time next year, with key officials
and many market participants predicting the move for the middle of
the year. The problem for central bankers is that inflation
continues to run well below the Fed's official 2% target rate.
Officials have consistently expected recovering labor markets and
solid economic growth to push inflation back toward the desired
level, only to see those forecasts dashed repeatedly.
Mr. Kocherlakota said in his speech that changes in inflation
tend to come slowly, so the weakness seen now will have a strong
influence over what is to come. The "sluggish inflation outlook
implies that, at any FOMC [Federal Open Market Committee] meeting
held during 2015, inflation would be expected to be below 2% over
the following two years." He explained "it would be inappropriate
for the FOMC to raise the target range for the fed funds rate at
any such meeting," echoing comments he's made before. "With
inflation as low as it is why is it that accommodation is being
reduced? I think that's a question that's hard to answer," the
official said.
The policymaker noted "inflation tends to be highly persistent,
and so this long stay below target suggests that it will take some
time for inflation to get back to 2%." He added that he doesn't
expect to see inflation on target until 2018.
Mr. Kocherlakota said that with inflation at current levels,
there is a case to be made for more Fed stimulus. "As long as we
have inflation as low as we have, there's more we can do as
monetary policy makers, because were not facing a tension between
our mandates," he said, adding "the question of have we done enough
on the employment front only comes up once we get inflation back to
2%."
The Fed's official policy stance is that inflation below 2% is
as undesirable as price pressures above that marker. Mr.
Kocherlakota said in his speech the Fed could gain additional power
over monetary policy's potency by clarifying how the central bank
will reach that level.
"The FOMC should consider articulating a benchmark two-year time
horizon for returning inflation to the 2% goal," Mr. Kocherlakota
said. "If the FOMC publicly articulated a reasonable time benchmark
for achieving the inflation goal, the Committee would be led to
pursue its inflation target with even more alacrity."
Mr. Kocherlakota expressed some ambivalence about the Fed's
bond-buying program that ended last week. He said lowering rates is
clearly the most powerful move the Fed can make, but that ceased to
be an option once rates hit near zero, so the Fed had to try
something else.
Bond buying isn't as effective as short-term interest rate
changes, Mr. Kocherlakota said. "I came to the program as a skeptic
but I think that it was certainly effective at lowering long-term
yields." He added, "it provides some amount of stimulus as well to
the overall economy. It's hard to know how much."
Write to Michael S. Derby at michael.derby@wsj.com