The Federal Reserve should not raise its target interest rate this year, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota repeated Thursday night.
"Raising the target range for the fed funds rate in 2015 would only further retard the pace of the slow recovery in inflation," Kocherlakota told a town hall in Minneapolis, according to prepared text released by the Fed. "It would also increase the risk to the credibility of the FOMC's inflation target, in the sense that the public could increasingly perceive the FOMC as aiming at a lower inflation rate. Hence, given my current outlook for inflation, the FOMC can best achieve its macroeconomic objectives by not raising the fed funds rate target this year."
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He also said it would "be appropriate" to not "reduce stimulus" this year in order to promote maximum employment. "Increases in stimulus push upward on employment, and employment increases are always consistent with the pursuit of maximum employment that Congress has mandated for the FOMC."
With personal consumption expenditure inflation running at an average below 1.4% for the past three years, and below the Fed's 2% target for more than two and a half years, he said, "The Committee has not provided sufficient stimulus to hit its inflation target."
Additionally, "persistent underrun of the inflation target" threatens the FOMC's credibility, he said. "For monetary policy to be effective, it is critical that investors and other members of the public believe that the FOMC is in fact aiming at 2 percent inflation, and not at some higher or lower figure. Persistent deviations from that target may weaken those beliefs."
Market expectations for longer-term inflation have slid recently, which Kocherlakota said is a sign "of exactly this kind of reduction in FOMC credibility," adding, "The FOMC, so far, has largely failed to take substantial policy action in response to these declines. That lack of a response creates additional downside risk to the credibility of the 2% inflation target."
