3/21/2014 1:52:00 PM Fed dissenter: policy action a mistake
WASHINGTON (AP) — A Federal Reserve official who dissented from this week’s policy decision said Friday that the Fed should have said it planned to keep a key interest rate at a record low until unemployment falls below 5.5 percent.
The Fed’s policy statement no longer cites a specific unemployment rate that might lead it eventually to raise short-term rates. The Fed instead says it will monitor a range of information before approving any rate increase.
Narayana Kocherlakota, president of the Fed’s Minneapolis bank, said this shift, which the Fed approved 8-1, will hurt the economy.
“The new guidance fosters policy uncertainty and thereby suppresses economic activity,” Kocherlakota said in a statement explaining his dissent.
Kocherlakota said that lowering the threshold for considering a rate hike from 6.5 percent unemployment to 5.5 percent would have enhanced the Fed’s commitment to low rates until inflation nears its 2 percent target. Inflation is now running around 1 percent, and the unemployment rate is 6.7 percent.
Kocherlakota said a better approach would have been a statement saying the Fed intends to keep rates at record lows until unemployment has fallen below 5.5 percent — as long as expected inflation was below 2.25 percent and any “possible risks to financial stability remain well-contained.”
On Wednesday, the Fed held its first policy meeting under its new chair, Janet Yellen. Afterward, it said it would weigh a range of economic measures in deciding when to begin raising its key target for short-term rates. The Fed has held its benchmark rate at a record low near zero since December 2008.
At a news conference afterward, Yellen unsettled financial markets in answering a question about what the Fed meant in saying short-term rates could remain low for a “considerable time” after it stops buying bonds to keep long-term rates low.
Yellen replied that that phrase could mean “something on the order of around six months.” That is a shorter time than some investors had anticipated for a possible rate hike. Her comment appeared to conflict with her other remarks at the news conference that the Fed’s decision on when to raise rates would depend on economic conditions.