Fed official: New chair to face key test on keeping policy easy

Fri Oct 4, 2013 6:51pm EDT
 
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By Alister Bull

(Reuters) - The key challenge for the next chair of the Federal Reserve will be resisting pressure for a premature tightening in monetary policy, a senior U.S. central banker said on Friday.

Narayana Kocherlakota, president of the Minneapolis Federal Reserve and one of several policy doves arguing the case for more action to spur U.S. hiring, said most observers think the main problem for the Fed will be ending ultra-easy money. He said it is not.

"The real test for us ... (is) going to be about being able to keep a high level of accommodation in place, even as there (are) a lot of onlookers and observers calling on us to back off," he said. "The leadership being provided by the chairperson in that regard will be critical."

President Barack Obama is expected to nominate his choice to succeed Fed chief Ben Bernanke, whose term ends in January, in the next few weeks. A White House source has said that Fed Vice Chair Janet Yellen is the top candidate.

Some observers argue that whoever succeeds Bernanke will be judged on how smoothly an exit from five years of unprecedented monetary easing is executed.

The Fed cut interest rates almost to zero in late 2008 and more than tripled the size of its balance sheet, to $3.7 trillion, via three rounds of massive bond purchases aimed at holding down long-term borrowing costs.

Kocherlakota dismissed worries about the eventual exit from the Fed's ultra-easy measures, saying that the question of how to normalize monetary policy has been "studied to death" within the Fed.

"We know about it. We have a great deal of confidence, based on our staff work, about how that is going to work," he told an audience in Bloomington, Minnesota.   Continued...

 
Minneapolis Federal Reserve Bank President Narayana Kocherlakota speaks at a macro-finance conference hosted by the Boston Federal Reserve Bank and Boston University in Boston, Massachusetts November 30, 2012. REUTERS/Brian Snyder