The Federal Reserve may need to let inflation run a little higher than its 2-percent target in order to bring down unemployment faster, a top Fed official said on Saturday.
Strictly capping inflation at 2 percent while allowing high unemployment to linger would be an “inappropriate” approach to monetary policy, Minneapolis Federal Reserve Bank President Narayana Kocherlakota suggested in slides prepared for presentation at the Istanbul Center for Economic Research.
Instead, a balanced approach to policy could mean letting inflation run slightly hot for several quarters in order to speed the economy’s path toward full employment, the slides suggested.
Kocherlakota’s prepared slides contained little commentary beyond quotations of stated Fed policy, and offered little insight into the most pressing question of the day for Fed policy watchers: whether and when the U.S. central bank will ease up on the monetary gas pedal by reducing its bond-buying program, now at a massive $85 billion a month.
But graphs plotting inflation and unemployment under “balanced” and “inappropriate” scenarios did suggest that Kocherlakota has no appetite for policies that would allow unemployment to stay high for many years.
Kocherlakota has been virtually alone among top Fed officials in urging his colleagues to ease monetary policy even further to bring down unemployment faster.
Chosen excerpts by Job Market Monitor