Thursday, April 25, 2013

UPDATE 2-Focus on US unemployment as inflation in check, Fed doves say

By Jonathan Spicer

BOSTON, April 13 (Reuters) - Two dovish Federal Reserve policymakers on Saturday highlighted the U.S. central bank's good record keeping inflation close to target, arguing the Fed needs to stay focused on accommodative policies despite some outsized fears over future inflation.

Chicago Fed President Charles Evans and Narayana Kocherlakota of the Minneapolis Fed, speaking at a forum on how best to heal the troubled U.S. labor market, in effect sought to push back against more hawkish-minded officials who want to wind down the Fed's extraordinarily easy monetary policies.

Evans said inflation pressures look low now, and the Fed's easy policies have helped slowly move the unemployment rate down toward 5.5 percent, which he called a sustainable level.

U.S. joblessness stood at 7.6 percent last month, down from 10 percent in 2009. The Fed's preferred inflation measure is around 1.3 percent, below its 2 percent target.

"Without signs of actual inflation, many inflation-risk discussions ultimately raise this specter of ... unlocking the long-ago-vanquished inflation demons from the dungeon," said Evans, a voting member of the Fed's policy committee this year.

"We have to monitor it, we have to be mindful, but I don't think we should obsess over it," he said, adding the Fed's inflation performance has been "really good."

"Chairman Bernanke will go down as one of the best Fed chairs for many many reasons, but also because the inflation performance has been good."

NOT HIGHER BUT LOWER POLICY THRESHOLDS

The Fed is buying $85 billion in Treasury and mortgage securities per month and has promised to keep interest rates near zero for a long while more to support the stop-start U.S. economic recovery and get Americans back to work.

While policy doves currently hold sway over Chairman Ben Bernanke and the majority of Fed policymakers, minutes from last month's policy meeting suggest the quantitative easing program could draw to a close by year end, earlier than some economists had expected.

Like-minded and speaking alongside Evans, Kocherlakota argued that a balanced policy approach would allow inflation to deviate somewhat from its 2-percent inflation goal in order to lower U.S. unemployment.

"A balanced approach would allow for deviations of inflation from its longer run goal in order to facilitate a faster decline in unemployment back to its desired level," Kocherlakota said.

Kocherlakota is alone in advocating for even more accommodation from the Fed in the form of lowering to 5.5 percent, from 6.5 percent currently, the "threshold" at which the central bank will consider raising rates from near zero.

On Saturday, he told reporters that while it would be ok to lower the threshold, it would be "very confusing for the public" if the Fed were to raise that threshold.

"I would strongly advise against doing this," he said, because the Fed has said it will keep rates low until that point. But, he added, it hasn't said "anything about what could do after that, which allows for the possibility that we could always lower the threshold."


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