Monetary policy can help the pace of recovery in the labor market Federal Reserve Bank of Minneapolis President Narayana Kocherlakota reiterated Friday, noting that the labor market has improved at a "painfully slow" rate the past four years.

"These low levels of inflation tell us that monetary policy can be useful in increasing the rate of improvement in the labor market," he told a conference in Bloomington, Minn., according to prepared text released by the Fed.

"At a basic level, monetary stimulus increases the demand for goods among households and firms. This higher demand for goods tends to push upward on both prices and employment. Hence, the downside with using monetary policy to stimulate employment is that, when employment is near its maximum level, further stimulus can lead to unduly high inflation," Kocherlakota said, echoing comments he made last week. "But the data show that over the past few years inflation has been below the FOMC's target of 2 percent. It's expected to remain below desirable levels for years to come. These low levels of inflation show that the FOMC has a lot of room to provide much needed stimulus to the labor market."

Since the poor jobs situation is a "considerable hardship" for many and "represents a significant waste of resources for the national economy," Kocherlakota said, "those of us who are charged with making economic policy should do whatever we can to facilitate a faster rate of improvement in labor market conditions."

It's up to the Federal Open Market Committee "how best to deploy" the "considerable monetary policy capacity" available, he said. Kocherlakota suggested a two-step approach: communicating the Fed's "goal" of "a fast return to maximal employment while keeping inflation close to, although possibly temporarily above, the target of 2 percent. The second step is to do whatever it takes, on an ongoing basis, to achieve that goal. A goal-oriented approach to monetary policy greatly reduced inflation in the early 1980s. Adopting such an approach in our own time would improve labor market outcomes."

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