MNI INTERVIEW:Fed May Cut Rates Despite Election: Kocherlakota

By Pedro Nicolaci da Costa

     WASHINGTON(MNI) - The Federal Reserve could cut interest rates further this

year in order to boost inflation and inflation expectations that have long

hovered below the central bank's 2% target, former Minneapolis Fed President

Narayana Kocherlakota told MNI Thursday, adding that coronavirus added to the

dovish case and that the upcoming election may not deter the Fed from acting.

     The central bank has unduly locked itself in by saying it expected to keep

rates on hold for the entirety of 2020, Kocherlakota said in an interview.

     "I'm not a big fan of pauses," said Kocherlakota, now a professor at the

University of Rochester. "I don't know why the Fed puts itself in a box. You

could easily imagine that the Fed is going to cut rates--[especially] now that

you've got the coronavirus."

     After some monetary tightening in 2018, the Fed cut interest rates three

times in 2019 to a target range of 1.5% to 1.75%. It has since vowed to keep

them steady for the foreseeable future.

     Many analysts think the Fed would be reluctant to move rates closer to the

2020 presidential election for fear of appearing political. Kocherlakota argued

the opposite is true--such a calculated pause might "give rise to the feeling

that you're doing this for political reasons."

     Although growth is still around 2% and unemployment near historic lows at

3.5%, Kocherlakota says a lack of wage growth is emblematic of a deeper problem

for the Fed: what appears to be a permanent weakening of U.S. inflation

expectations that policymakers will have to counter to avoid more prolonged

periods of stagnation like those experienced in Europe and Japan.

     "It's a big problem. How do you get inflation expectations back up as we

get a young group of people making economic decisions who have never experienced

inflation?" Kocherlakota wondered.

     --LOSING CREDIBILITY

     The Fed has undershot its inflation target for most of the recovery from

the Great Recession, which Kocherlakota says makes the target much less credible

than it once was.

     The Fed's framework review, whose results are expected mid-year, will be

too meek to have a substantial impact on the future conduct of policy, he said.

     He thinks the Fed will at most move to a system of inflation averaging

rather than the currently narrower 2% inflation target, but will almost

certainly skirt bolder and, he thinks, potentially more effective tools such as

a higher inflation target or negative interest rates.

     "It would be good for them to have a stronger commitment to overshoot" the

2% inflation target after prolonged periods of undershooting.

     The former policymaker said he's not concerned about record-breaking stock

prices, which have reacted in part to the re-expansion of the Fed's balance

sheet to around $4.2 trillion.

     "I don't think asset prices should be influencing the course of monetary

policy," Kocherlakota said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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