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Sep 21, 2012, 12.42 PM IST
A Federal Reserve policymaker known for his hawkish stance pitched a bold and perhaps surprising proposal on Thursday to keep interest rates low until the US unemployment rate drops to 5.5%, as long as there's no pick up in inflation.
Minneapolis Fed President Narayana Kocherlakota, one of 19 monetary policymakers in the United States, suggested the goal would likely take four or more years to reach given the nation's current 8.1% jobless rate. The US central bank should keep its vow, he said, as long as inflation expectations stay under control.
In separate speeches around the country, two other top Fed Mofficials also downplayed the risk that the central bank's new and potentially massive asset-purchase plan would spark a run up in prices in the months or years to come.
Last week, the Fed said it expected to keep its key federal funds rate near zero at least through mid-2015, and that it will retain such policy accommodation for "a considerable time after the economic recovery strengthens."
Moving aggressively to boost the slow US recovery and troubled labor market, the policy-making Federal Open Market Committee (FOMC) also unveiled a plan to buy USD 40 billion in longer-term securities per month until the labor market improves substantially.
"This specificity - about an event that may not take place for four or more years - will provide needed current stimulus to the economy," Kocherlakota said in a speech in Ironwood, Mich.
Given the behavior of inflation over the last 15 years, unwanted inflation is unlikely to kick in until unemployment falls near that level, Kocherlakota told a group at the community college in this struggling former mining town.
"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%," he said. "The FOMC can provide more current stimulus if people believe that liftoff will be triggered by a lower unemployment rate."
The US economy grew just 1.7% in the second quarter, not enough to put a dent in the nation's 8.1% jobless rate.
Fed officials are toying with the idea of giving more specific guidance on when it expects to finally tighten policy, for example by tying rate rises to specific levels of unemployment and inflation.
Chicago Fed President Charles Evans, who is one of the central bank's most aggressive doves, has urged the Fed to vow low rates until the jobless rate reaches 7%, unless inflation rises above 3%.
Economists polled by Reuters last week fingered a 7% jobless rate as the level at which the Fed would consider halting its purchases of mortgage-backed securities, according to the median of forecasts.
The Fed's consensus prediction for 2015 - the farthest the forecasts go out - is for a 6% to 6.8% jobless rate, well above Kocherlakota's 5.5% threshold.
In the speech, Kocherlakota emphasized that 5.5% unemployment should not be seen as a trigger for policy change, but merely a threshold at which the Fed should consider a rate rise.
Also on Thursday, both Atlanta Fed President Dennis Lockhart and Boston Fed President Eric Rosengren argued the inflation risks from the central bank's third round of quantitative easing, or QE3, are manageable and offset by the economic benefits they hope will come.
"I simply came to the conclusion on a net basis that (it) would help the economy," Lockhart told reporters in Kansas City. "The potential risks associated with that were not severe and were, and will be in the future, manageable."
Lockhart - who unlike Kocherlakota and Rosengren has a vote on Fed policy this year - said the risk of a serious bout of inflation was "remote," despite critics' concerns that the douse of new liquidity into the economy could stoke higher prices in the future.
In Quincy, Mass., Rosengren argued that the risks of QE3 are considerably smaller and more manageable than doing nothing. The Fed is taking "appropriate and forceful action to help the US avoid a prolonged economic stagnation," he said.
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