Fed’s Kocherlakota: Fed Shouldn’t Raise Rates Until Late 2016

Minneapolis Fed President Narayana Kocherlakota on Tuesday laid out a case for waiting until the second half of 2016 to start raising interest rates, and to then raise them gradually to just 2 percent by the end of 2017.  It was the first time the dovish policymaker detailed his preferred path for “late and slow” rate hikes. His remarks afterwards to reporters suggest he is increasingly worried that market expectations for nearer-term rate rises, fueled by comments from many of Kocherlakota’s Fed colleagues, could knock the wind out of the economic recovery.

“That conversation (about raising rates) in and of itself is a tightening of policy,” Kocherlakota said. “I do worry about the ongoing conversation about tightening monetary policy being a drag on economic performance both in terms of growth and in terms of employment outcomes.”  Most Fed policymakers, including Fed Chair Janet Yellen, believe the Fed will need to start raising rates this year as the labor market improves and begins to put upward pressure on excessively low inflation. The U.S. central bank has kept rates near zero since December 2008.

Some of the Fed’s more hawkish policymakers have even pressed for a rate rise as early as June, warning that waiting too long could force the Fed to hike borrowing costs sharply to head off a potential surge in unwanted inflation.  “I continue to believe that it would be a mistake to raise the target range for the fed funds rate in 2015,” Kocherlakota told the Bismarck-Mandan Chamber of Commerce. Because of still-low employment and excessively low inflation, he said, the Fed should “start late and raise (rates) more slowly than we did in 2004 to 2006,” the last time the Fed boosted rates