US Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the US central bank would have been “totally justified” if it had increased policy stimulus to combat low inflation when it met last month, adding that negative interest rates could be a useful policy tool.
Speaking in an interview on Tuesday with Arthur Levitt on Bloomberg Radio, he declined to say if he had recommended negative interest rates in projections submitted for the Sept. 16 to Sept. 17 meeting of the Federal Open Market Committee (FOMC).
However, he did say that more aggressive Fed policy was warranted than the current setting of near-zero rates.
“Given the inflation outlook, given how low inflation is expected to be, to ensure the credibility of our inflation target, taking a more accommodative stance in September would have been totally justified,” Kocherlakota said in the interview, broadcast on Saturday.
He steps down from the Fed on Dec. 31 and is not a voting member of the FOMC this year.
The FOMC decided last month to hold rates near zero, though Fed Chair Janet Yellen said on Sept. 24 that she expected that the central bank’s first rate increase since 2006 would be warranted later this year.
Kocherlakota has repeatedly argued for a delay in rate liftoff.
“My main point — this is a time to think about adding accommodation, not a time to be thinking about taking it away,” he said.
Policymakers submit quarterly economic forecasts, including their projections for the appropriate future path of the federal funds rate, which has been held near zero since December 2008. Displayed as dots on a chart, forecasts on the so-called “dot-plot” released on Sept. 17 showed that one official viewed the appropriate rate at the end of this year and next year to be slightly less than zero.
Kocherlakota said he was prevented by the Fed’s rules of confidentially from disclosing if this was his dot, though he expressed interest in the decision of central banks in Sweden and Switzerland to drive rates below zero.
“I think it’s another useful tool in our toolkit that we should be surely thinking about,” he said, in response to the question of whether the Fed should consider doing likewise if officials decided there was a need to stimulate the economy more aggressively.
“It’s been very interesting what the European central banks have been able to do in terms of actually provide more stimulus than I would have expected, by driving interest rates below what economists used to call the zero lower bound,” Kocherlakota said.
“Negative interest rates was not something that we considered very seriously at all,” Yellen said at a FOMC conference on Sept. 17.
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