Fed's Kocherlakota : Fed Taking Risk On Credibility of 2% Inflation Target\

        By Michael S. Derby
        Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Thursday the U.S. central bank is taking a big gamble by not acting more forcefully to defend its official 2% inflation target.
        Noting that inflation has fallen short of the target for two and half years, Mr. Kocherlakota said financial markets are taking notice of the Fed's lack of action to push price pressures back up to levels the central bank says it officially desires. If this situation persists, he warned the public made lose confidence that the Fed is willing to take the steps necessary to push inflation higher.
        The Fed "has not provided sufficient stimulus to hit its inflation target," the official said. "Persistent deviations" from the 2% target may weaken beliefs the Fed really wants inflation on target, Mr. Kocherlakota said.
        Market-based measures of future inflation are taking heed of the Fed's lack of "substantial policy action" to falling inflation expectations, he said. The Fed's "lack of response," Mr. Kocherlakota said, "creates additional downside risk to the credibility of the 2% inflation target."
        Mr. Kocherlakota, who will leave the Fed at the start of next year, has been for some time one of the central bank's strongest supporters of taking robust steps to stimulate growth and push price pressures higher. He dissented at three Fed meetings last year, fearing the central bank's slow evolution toward raising rates was out of line with the economy's likely path.
        Most on the Fed expect to raise rates this year, with key officials pointing to the middle of the year as the most appropriate time to act. If that proves to be the case, Fed officials will almost certainly be boosting borrowings at a time when inflation is well below 2%. Many economists expect to see negative price readings through the start of the year due to falling energy prices, and some predict a deflationary environment for much of the year. To raise rates in such a climate would be unprecedented.
        Most Fed officials continue to expect inflation to rise back to their target and reckon that outside of energy, price pressures, as well as the public's expectation of future inflation, are largely steady. Solid growth and continued job gains signal the Fed is getting closer to the time it can raise rates, by their reckoning.
        Mr. Kocherlakota, who does not have a vote on the monetary policy setting Federal Open Market Committee this year, repeated his belief that raising rates this year would be a bad idea.
        "Given my current outlook for inflation, the FOMC can best achieve its macroeconomic objectives by not raising the fed funds rate target this year," he said.
        "It will take a few years for inflation to return to 2% from its current low level," the official said. "Raising the target range for the fed funds rate in 2015 would only further retard the pace of the slow recovery in inflation. It would also increase the risk to the credibility of the FOMC's inflation target," Mr. Kocherlakota said.
        (END) Dow Jones Newswires

        January 08, 2015 20:01 ET (01:01 GMT)

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