Kocherlakota: Mistake to Raise Rates This Year

The Federal Open Market Committee must display extraordinary patience and hold off raising the fed funds rate this year to reach its dual mandate, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Thursday.

"The FOMC can only achieve its congressionally mandated price and employment goals by being extraordinarily patient in reducing the level of monetary accommodation. Under my current outlook, I continue to believe that it would be a mistake to raise the target range for the fed funds rate in 2015," he told an audience in Helena, Mont., according to prepared text released by the Fed.

Writing off the possibility of a "the American labor market is trapped in some kind of dismal 'new normal,'" Kocherlakota said, "I believe that policymakers should strive to facilitate ongoing improvement in labor market outcomes until they more closely resemble those that prevailed before the Great Recession."

That recovery "is likely to take some time," he admitted. While the labor market showed more improvement "in 2014 than it had in almost 20 years," it would take another three years of such improvement for "conditions to return to their 2006 levels. It follows that monetary policymakers should be extraordinarily patient about reducing the level of monetary accommodation."

Having seen "four months of labor market data from 2015," Kocherlakota called economic activity "subdued" during that period and suggested, "economic output, measured in terms of real gross domestic product, may well have contracted during that period of time. Despite this sluggishness, though, key labor market metrics continued to improve, although at a slightly slower rate than what we observed in 2014."

Since there is no "new normal" for the labor market, the FOMC "needs to make policy choices that will lead to more great years like 2014." Kocherlakota expects the inflation target to be reached in three years. "Consequently, my assessment is that the Committee will be able to achieve desirable employment or price outcomes only if it is extraordinarily patient about reducing the level of existing monetary accommodation. In particular, I don't see raising the target range for the fed funds rate above its current low level in 2015 as being consistent with the pursuit of the kind of labor market outcomes that we are charged with delivering."

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