Fed should beef up low-rate vows, two officials say

Tue Apr 15, 2014 10:25pm EDT
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By Alicia Underlee Nelson and Richard Valdmanis

FARGO, North Dakota/BANGOR, Maine (Reuters) - The U.S. Federal Reserve ought not to raise interest rates until the economy is much closer to full strength, two of the Fed's most dovish policymakers said on Tuesday.

"If you commit to keeping rates low even as the recovery is proceeding, even as we continue to recover, I think people have a sense, the Fed has the recovery's back," Minneapolis Federal Reserve Bank President Narayana Kocherlakota said at North Dakota State University. "And that's the message that I think we need to do a better job of promoting."

If households and businesses believe the Fed is close to raising rates, they may decide to save rather than to spend, inhibiting recovery, Kocherlakota said.

But because inflation is so low, he said, the Fed can afford to remain accommodative even while the recovery strengthens, and it will likely need to raise rates only gradually when the time comes.

Inflation firmed a bit last month but remains well below the Fed's 2 percent target.

Meanwhile unemployment, at 6.7 percent, remains well above the 5 percent to 6 percent level that most economists consider normal.

Separately, in Bangor, Maine, Boston Fed President Eric Rosengren floated the idea of promising to keep interest rates near zero until the U.S. economy is within one year of reaching the central bank's employment and inflation goals.

"Ideally, forward guidance should, for the time being, remain qualitative but increasingly be linked to progress in achieving our dual mandate based on incoming economic data," Rosengren said at Husson University. "Forward guidance should be consistent with keeping interest rates at their very low level until we are within one year of reaching full employment and our 2 percent inflation target - and the guidance could explicitly state that intention."   Continued...

A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing