Via the WSJ:
One of men who cast a dissenting vote at this week’s Federal Reserve policy meeting said Friday the U.S. central bank is playing an increasingly risky game that could lead to further declines in already weak inflation.
The official, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, said in statement the persistent weakness of inflation in the U.S. economy calls into question any move by the Fed toward raising interest rates. The fact that the Fed is edging toward higher rates “creates an unacceptable downside risk to inflation and inflation expectations,” he said.
Mr. Kocherlakota was one of three officials who offered formal votes of opposition against the policy stance put in place by the Fed at its monetary policy meeting it held over Tuesday and Wednesday.
In that gathering, the Fed upgraded its economic assessment and indicated it would be patient with the timing of interest rate increases. In a news conference after the meeting, Fed Chairwoman Janet Yellen said the Fed is “unlikely to begin the normalization process for at least the next couple of meetings,” suggesting long-standing expectations the Fed would raise short-term rates off their current near zero levels in the middle of next year remain in place.
The Fed’s decision brought a rare level of opposition, earning three “nay” votes for the first time since 2011. While Mr. Kocherlakota was worried the Fed would raise rates too soon, the leaders of the Dallas and Philadelphia Fed banks had very different worries. Dallas’ Richard Fisher said he believed rate rises will likely be needed sooner than many of his colleagues expect. Philadelphia’s Charles Plosser said he is uncomfortable with a policy outlook that still appears to imply short-term term rates will be held at very low levels for a predetermined amount of time.
Mr. Kocherlakota, who had already dissented two other times this year, had very different concerns. He continued to wonder why the Fed would consider raising rates when price pressures, currently at a 1.4% annual rise, remain short of the Fed’s official 2% inflation target.
He noted in his brief statement that inflation under the Fed’s target has persisted for 30 months, and that Fed forecasts expect price rises to fall short of a 2% gain for several more years. Expectations of future inflation, which had been stable, have begun to soften, based on market indicators.
The Fed’s “failure to respond to weak inflation runs the risk of creating a harmful downward slide in inflation and longer-term inflation expectations of the kind that we have seen in Japan and Europe,” Mr. Kocherlakota said. “I see this risk to the credibility of the inflation target as unacceptable, given how hard it would be for the Federal Open Market Committee to respond successfully if this eventuality did indeed materialize.”
As he has for some time, Mr. Kocherlakota said he would like the Fed to commit to keeping short-term rates at near zero levels as long as the one to two year outlook for inflation stayed below 2%. He also wanted the Fed to signal it would be ready if needed to employ more stimulus, including renewed long-term bond purchases, to push inflation back up.
Mr. Kocherlakota’s dissenting vote this week is the last of his Fed career. He announced last week he would leave the Minneapolis Fed at the start of 2016.