Minneapolis Federal Reserve Bank President Narayana Kocherlakota Thursday called on the central bank to provide even more support to the ongoing economic recovery, arguing concerns about risks to financial stability do not yet supersede the need to spur faster job creation and maintain price stability.
Speaking to reporters on the sidelines of the Hyman Minsky conference in New York, Kocherlakota said , with regard to possible bubbles forming in asset classes, "Right now ... I don't see those kinds of risks out there."
Kocherlakota is not a voter on the policy-setting Federal Open Market Committee this year.
The question to be asked, he said, is do financial stability risks loom large enough to warrant taking monetary policy action to do something about them.
"Is it (monetary policy) effective enough at mitigating that risk to warrant the loss of jobs and the disinflationary pressures? The answer to that is absolutely not at this stage," Kocherlakota said.
"The worry about financial stability is still so tenuous that I would not want to be robbing the immediate stimulus to the economy on that basis," he added.
Kocherlakota said he sees inflation running below target over the next two years, while the unemployment rate remains elevated.
Speaking at the same conference Wednesday, St. Louis Fed President James Bullard has said he would support ramping up the Fed's bond purchases - currently at a pace of $85 billion a month - should inflation continue to decline.
Asked for his thoughts, Kocherlakota said his outlook for inflation has not changed yet although the recent drop "is certainly a cause for concern."
The Fed cannot risk delivering too little inflation relative to what it promises, he said, so it is important to protect the FOMC's 2% inflation target "both from above ... and from below as well."
"I'm in favor of more accommodation," Kocherlakota declared, and so inflation softening "would make me even more in favor of more accommodation."
In his prepared remarks, Kocherlakota had argued that the FOMC needs to put on "some more serious winter gear if it is to get the economy back to the right temperature."
Asked by MNI what would constitute more serious action by the Fed, Kocherlakota again said the FOMC would provide additional stimulus to the economy by lowering its unemployment threshold to 5.5% from 6.5%.
"That would provide even more of a guarantee in terms of how long interest rates were going to remain (exceptionally low), that would push downward further on real interest rates and provide more stimulus to demand," he said.
Kocherlakota was then asked whether "more serious winter gear" also meant upping the scale of the Fed's asset purchases.
"We have to become a lot more clear about what exactly are the metrics associated with that," Kocherlakota said, noting that the FOMC's vow to maintain the aggressive bond purchases until there is a "substantial improvement" in the labor market outlook, is being subjected to different interpretations.
"I think we'd really solve a lot of problems, in terms of the fed funds rate, by being much more explicit about the markers for that (QE3)," Kocherlakota said.
Kocherlakota added that he feels more confident in the ability of forward guidance to provide the requisite stimulus because the FOMC has been so clear about it.
As to the effectiveness of the Fed's policies, Kocherlakota argued that they are having an impact on the economy - arguing that the Fed's asset purchases have not only pushed down the yields of the securities being bought, but also yields "across the economy."
"So I think that there is evidence that our actions are being effective," he said, before adding, "it would be nice if we did even more."
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