January 15, 2013 / 3:56 PM / 5 years ago

WRAPUP 1-Doves push back on Fed's hawks, call for more US easing

GOLDEN VALLEY, Minn./PROVIDENCE, R.I., Jan 15 (Reuters) - T wo dovish Federal Reserve officials pushed back against some of their more hawkish peers on Tuesday, arguing that the U.S. central bank’s accommodative policies are appropriate and may even need to be eased further.

In a speech that stamped him as perhaps the most dovish of the central bank’s 19 policymakers, Minneapolis Federal Reserve President Narayana Kocherlakota said the Fed “should provide more monetary accommodation” by targeting a 5.5 percent unemployment level.

Just last month, the Fed vowed to keep interest rates near zero until the unemployment rate falls to 6.5 percent from 7.8 percent currently, as long as inflation expectations remain below 2.5 percent.

But Kocherlakota wants to go even further.

Based on his predictions for both inflation and unemployment, Kocherlakota said: “It would be appropriate ... to increase the level of monetary accommodation by lowering the unemployment rate threshold to 5.5 percent.”

Setting a lower threshold for the central bank to even consider raising interest rates would boost demand, inflation and employment, he told the Financial Planning Association of Minnesota.

Inflation is currently about 1.5 percent, according to the Fed’s preferred measure, below a 2 percent target. U.S. GDP grew at a decent 3.1 percent in the third quarter, the fastest pace since late 2011, though it is expected to have slowed in the last three months of the year.

In Rhode Island, Boston Fed President Eric Rosengren brushed aside concerns that some Fed officials have recently expressed over inflation, making it clear that he will support the central bank’s efforts this year to relieve U.S. joblessness.

In a textbook argument for a continuation of current monetary policy, he said such a stance should raise inflation and lower unemployment toward their stated goals.

“Continued monetary accommodation is absolutely appropriate and indeed needed as long as we are projected to miss on both elements of the Fed’s dual mandate, inflation and employment,” Rosengren told the Greater Providence Chamber of Commerce.

Rosengren - who unlike Kocherlakota has a vote on Fed policy this year - said he doesn’t expect to reverse the central bank’s accommodative policy stance “for most of this year.”

He added that the Fed’s unprecedented efforts have already encouraged Americans to buy homes and cars and other goods that help spur economic growth, for which he predicted an acceleration.

The Federal Open Market Committee, the group of Fed officials who set U.S. monetary policy, next meets on Jan. 29-30.


The federal funds rate has been near zero since late 2008, which was the nadir of the financial crisis that stunned the U.S. economy and sparked a deep global recession.

Last month’s interest-rate pledge comes even as the Fed buys $85 billion in longer-term assets per month - effectively a two-front effort by the central bank to spur investment and growth three and a half years after the end of the Great Recession.

More hawkish Fed officials, however, argue that year after year of low rates and the use of unconventional - and untested - policies such as the asset purchases set the stage for a run-up in inflation and could disrupt financial markets.

Kansas City Fed President Esther George and James Bullard of St. Louis - both of whom have a vote on policy this year - expressed such reservations last week.

Minutes from the central bank’s December meeting show deep divisions between those policymakers who want to slow or stop the bond buying this year, and those who want it to last longer.

Still the majority of top Fed officials, including Chairman Ben Bernanke, have tended toward the dovish end of the policy spectrum that is willing to do what it takes to repair the still-bruised U.S. labor market.

Last month’s unprecedented step of tying low interest rates to specific levels of unemployment and inflation was in part meant to stress the Fed’s commitment to getting Americans back to work.

In calling for still more policy easing just one month later, Kocherlakota’s speech set him apart from even Chicago Fed President Charles Evans, the central bank’s first and most vocal advocate for more easing using a threshold-based policy.

While Evans and Rosengren have signaled they are comfortable with current policy, Kocherlakota predicted that, under current conditions, unemployment will not fall below 7 percent for at least two years.

Inflation, he forecast, will be at 1.6 percent this year and 1.9 percent next year. The economy overall will grow about 2.5 percent this year, and 3 percent in 2014, Kocherlakota predicted.

Rosengren predicted economic growth would again pick up in the first half of this year, and rise to closer to 3 percent in the second half - assuming U.S. lawmakers do not disrupt the economy as they decide on tax and spending policies, he said.

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