MINNEAPOLIS — Minneapolis Federal Reserve Bank President Narayana Kocherlakota Tuesday expressed comfort in the Fed's current level of asset purchases and its language, but noted that analyzing the Fed buying and structural labor market changes are evolving while inflation seems not to be a major problem.
Effectiveness of asset purchases "is not a yes or no answer, it is evolving. In December, I thought the committee made the right decision at that stage."
"I think the asset purchase program is having benefits right now," and while weighing the pluses and minuses, "I am comfortable with current levels," Kocherlakota told reporters.
He sidestepped an MNI question on his thoughts about the Fed purchasing assets at what could be considered lofty levels. Instead, Kocherlakota went into a soliloquy about the asset purchase program and its conditionality and the winding down of the program.
The Fed is always "evaluating the effectiveness of the program," he said, noting that "asset purchases are historically a new central banking tool, especially on this scale."
But asset purchases lack the years of guidance and modeling of the interest rate tool. "We are still learning a lot about asset purchases," while at the same time evaluating both sides of asset purchase conditionality.
He also said the Fed is doing a lot of a lot of work at the micro level to analyze the labor market.
"I think it is important, for the public to know the Fed will stay accommodative until the economy is more normal. I think 6.5% unemployment is too high to consider normal," Kocherlakota said.
Kocherlakota said in analyzing the labor market, he focuses on improvements being translated into wage pressures.
"Structural changes are an ongoing evaluation, but our policy has an automatic safeguard. If we see intermediate outlook for inflation rising above 2%, that might make us think differently about the labor market."
"When the Fed is trying to stimulate the economy, there is a tradeoff between unemployment and inflation. It is not set by low monetary policy, but rather monetary policy is showing you where you are on the medium run. You cannot shift the Phillips curve," he said.
It would be "hard to see a lot of inflation when unemployment is above 5.5%," Kocherlakota said, but he added "when Fed moves rates it also influences inflation," effectively in lock step thus "all of this is predicated on having inflation well anchored."
"There would have to be very big changes in the structure of the labor market for inflation to translate into wage pressures," Kocherlakota said of the current environment, echoing the comments earlier Tuesday in a speech to the Financial Planning Association of Minnesota.
"Critical going forward is the thresholds that offer protection for the Fed as we think about structural versus cyclical unemployment trends," he said.
Earlier in his speech he noted that, "guidance clearly states that the Committee's commitment to a low fed funds rate is off the table if the medium-term inflation outlook ever rises above 2.5% ... I see it as unlikely that this threshold would ever be breached, even if the Committee were to lower the unemployment threshold to 5.5%."
He also repeated his earlier comment that "labor force participation going forward is less clear."
Commenting on the fiscal situation, Kocherlakota said it would have been better if the issues with the fiscal cliff were resolved more quickly. While he fully expects resolve on the budget issues, the effect of full sequestration and budget cuts, would have shaved 50 basis points off growth forecasts.
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