FOMC Member Kocherlakota Speaks

Aug 20, 2015

The departing leader of the Minneapolis Fed warned that changes in the natural level of interest rates could reduce the central bank's ability to influence the economy and increase the risk of destabilizing financial imbalances.

The official, Narayana Kocherlakota, made his comments in a speech to be given Thursday in Seoul, reprising themes he has given in recent remarks. Mr. Kocherlakota is leaving his role as president of the Federal Reserve Bank of Minneapolis at the end of this year.



Mr. Kocherlakota repeated his view that the Federal Reserve might have more ability to help the economy in a world where the government deliberately borrows more money and drives up interest rates.

"The decline in the long-run neutral real interest rate increases the likelihood of financial instability and the likelihood that the economy will run into the lower bound on nominal interest rates," Mr. Kocherlakota said in the text of his speech.

Mr. Kocherlakota observed there has been a decline in market-based interest rates, and because of this, the Fed has less room to loosen monetary policy in the event of new economic trouble. Meanwhile, cheap borrowing costs can drive excess in various parts of the financial sector, he said.

This creates a difficult trade-off for Fed policy makers when they seek to set interest rates at a level that will generate job growth while keeping inflation in line with desired levels, he said. Mr. Kocherlakota, who doesn't currently have a vote on the interest-rate-setting Federal Open Market Committee, didn't comment on the central bank's policy outlook in his formal speech. But he did warn strongly against the Fed raising rates, in an article published in The Wall Street Journal on Wednesday.

Mr. Kocherlakota said in his speech that the inability to cut interest rates when they hit effectively zero, where they are now, can be gotten around using bond-buying stimulus programs. But officials don't seem to have much appetite for those sorts of actions anymore amid fears these efforts can be the source of instability as well, he said.

"Monetary policy will be insufficiently accommodative during periods at the nominal interest rate lower bound, which will lead the economy to undershoot the FOMC's inflation and employment objectives," Mr. Kocherlakota said in his speech.