Now it’s the Fed doves who are agitated «
For the longest time, it was the hawks on the Federal Reserve who have been uncomfortable, out of a general sense the Fed has gone too far in its efforts to stimulate the economy.
But in the wake of the Fed’s decision in December to begin to start to pull back these stimulative efforts, it is the doves who are agitated.
And the most agitated is Narayana Kocherlakota, the president of the Minneapolis Federal Reserve Bank. He sits on the dovish extreme of the Fed policy committee and has a vote on the Fed’s policy committee this year.
In an interview with the Financial Times, Kocherlakota said the Fed needed to be doing more to stimulate the economy.
Kocherlakota seemed resigned to the idea that the majority on the Fed want to continue to taper its bond-buying purchases. Even other doves, such as Charles Evans, the president of the Chicago Federal Reserve Bank, have backed a steady tapering process as 2014 unfolds.
In the interview, the Minneapolis Fed president suggested easing steps that are outside the bond-purchase plan.
First, he called for the Fed strengthen its “forward guidance” to markets about its intentions to keep short-term interest rates low for longer.
At the moment, the Fed has pledged to keep the federal funds rate close to zero “well past” the point that the unemployment rate falls below its existing threshold of 6.5%
Kocherlakota called this guidance insufficient.
Instead, the Fed committee should say “we intend to keep the Fed funds rate extraordinarily low in that interval between 6.5% and 5.5 % as long as the medium-term outlook for inflation stays sufficiently close to 2%,” he said.
“I definitely feel it is important to be numerical about it. Words are always subject, I think, to multiple interpretations,” he added.
The second easing step would be to cut the interest rate the Fed pays on reserves parked at the central bank to negative from the existing level of 25 basis points.
“Doing something as surprising and drastic as cutting interest on excess reserves below zero – I think that would be a very powerful signal of the seriousness with which we take the 2% target for inflation,” he said.
Proponents say that cutting the IOER rate would spur banks to lend that money instead of keeping it at the central bank.