Non voting Fed member Narayana Kocherlakota is repeating his belief that “as long as the FOMC is continuing to satisfy its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5%. Kocherlakota defines “price stability” as inflation “within a quarter of a percentage point of the target inflation rate of 2%.” Now most of my readers know I’ve been highly critical of the Fed dating back to the Greenspan years and this commentary from Kocherlakota just gives me more reason to be critical. I apologize to those who are tired of hearing it but I feel its necessary to call them out when deserved. With $1.5T of excess banking reserves sitting with the Fed, after a 250% increase in the Fed balance sheet with money conjured out of nowhere, he thinks the US economy can somehow improve to such an extent that the unemployment rate is going to fall to below 5.5% and consumer price inflation will remain 2.25% or less. I of course don’t know what econometric models he is using but without using one I feel confident that this will be virtually statistically impossible. Just looking to last year, from April ’11 to Feb ’12, the headline PCE (the Fed’s preferred inflation gauge now instead of CPI) rose 2.4% or greater y/o/y while the unemployment rate was between 8.3% and 9.0%. Bottom line, while it can still be a ways off, the Fed’s memoirs won’t be fully written until this extraordinary policy is unwound as the process will be clearly eventful to say the least.
I say ‘no way’ to Kocherlakota
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