Minneapolis Federal Reserve Bank President Narayana Kocherlakota said Tuesday that while he expects inflation is headed back toward the central bank’s 2% target, it would take as long as four years to get there.
“The good news is that the FOMC does expect inflation to turn back toward 2%,” Kocherlakota said in remarks prepared for delivery at a Rochester Chamber of Commerce event in Minnesota. “However, I expect that return to 2% to take a long time – probably on the order of four years.”
Currently, the personal consumption expenditures index, the Fed’s favored inflation measure, is running near 1%. Since December 2007, it has averaged 1.5% per year.
Kocherlakota, a voter on the Fed’s policymaking Federal Open Market Committee this year, said inflation “has been running too low over the past six-plus years to be consistent with price stability.”
Citing the return to 2% inflation, part of the Fed’s dual mandate, Kocherlakota pointed out he’s not the only one forecasting a slow return to 2% inflation, “Earlier this year, the Congressional Budget Office predicted that inflation will not reach 2% until 2019,” he said.
Kocherlakota said this low inflation is a concern because it means “resources are being wasted.” While there are many resources are being wasted, he said “the biggest and most disturbing answer is our fellow Americans.”
“There are many productive people in the United States available to work more hours, and our society is deprived of their production,” he said.
Thus, the FOMC “is also underperforming on its other objective of promoting maximum employment,” Kocherlakota said.
Kocherlakota dissented at the March 18-19 FOMC meeting in which the committee removed numerical thresholds from its forward guidance instead relying on more qualitative measures.
He said it weakened the central banks credibility of its commitment to target 2% inflation and fosters policy uncertainty and “suppresses economic activity.”
Kocherlakota pointed out that while the unemployment rate has fallen to 6.7%, it’s “still unusually high relative to the past quarter century or so.” He said the current unemployment rate is “also high relative to most forecasts of its expected long-run level.”
As for his view, Kocherlakota said “Personally, I expect that, over the long run, the unemployment rate will converge to just over 5%,” adding that “an unemployment rate of 6.7 percent means that the U.S. labor market is far from healthy.”
Kocherlakota said that while this measure, “troubling as it is,” could “well overstate the degree of improvement in the U.S. labor market.”