The fed funds rate should remain "extraordinarily low" until the jobless rate drops below 5.5%, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota repeated Wednesday.
Being more precise than the Federal Open Market Committee "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens," Kocherlakota said in Great Falls, Mont., the FOMC should describe the conditions that would lead it to move rates higher.
"As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5%," Kocherlakota again suggested, according to prepared text of his remarks, released by the Fed.
"The substance of this liftoff plan is that, as long as longer-term inflation expectations remain stable, the Committee will not raise the fed funds rate unless the medium-term outlook for the inflation rate exceeds a threshold value of 2¼ percent or the unemployment rate falls below a threshold value of 5.5 percent. Note that neither of these thresholds should be viewed as triggers-that is, once the relevant cutoffs are crossed, the Committee retains the option of either keeping the fed funds rate extraordinarily low or raising the fed funds rate," he said.
The 5.5% rate, he added, is " the lowest unemployment rate threshold that it sees as unlikely to generate a violation of the price stability mandate."
While some criticized the plan as risking "getting behind the inflationary curve," Kocherlakota called that possibility "unlikely" since "current assessments of the long-run unemployment rate [remain] consistent with 2 percent inflation. But, in any event, the proposed liftoff plan provides an escape clause designed specifically to mitigate this risk. The plan allows the FOMC to raise the fed funds rate if long-term inflation expectations deviate too much from historical norms, or if the medium-term outlook for the inflation rate ever exceeds 2¼ percent. In this fashion, this plan explicitly maintains price stability as an objective while also promoting a more robust recovery."