MINNEAPOLIS (Reuters) - The U.S. Federal Reserve should consider raising interest rates as soon as this year, one top Fed official said on Wednesday, even as another warned it will take years at current growth rates before the economy regains full employment.
The differing views, from Minneapolis Fed President Narayana Kocherlakota and Cleveland Fed President Sandra Pianalto, show how the jobs outlook lies at the heart of disagreement at the Fed over how long the Fed should keep rates near zero, as it has since December 2008.
“We need more growth in order for more jobs to be created and in order for that unemployment rate to come down to that 6 percent rate which I view as maximum employment,” said Pianalto, a voting member of the Fed’s policy setting panel who supported its decision last month to promise low rates through late 2014.
At the 2.5 percent annual pace of growth that she expects, returning to full employment could take several years, she told an audience in Lexington, Kentucky.
But Kocherlakota, speaking in Minneapolis, argued that a decline in unemployment and an increase in inflation over the past year mean the Fed should be tightening policy - not today, but soon.
“I would say in six to nine months down the road we should begin to be thinking about initiating our exit strategy,” said Kocherlakota, who is not a voting member of the Fed’s policy-setting committee this year. “I don’t see a need for additional accommodation.”
On Friday, a government report showed the U.S. unemployment rate fell to 8.1 percent last month because more people gave up looking for work.
Kocherlakota said he views the decline in labor force participation as more persistent than some of his colleagues do, which partially explains why he believes rates may need to rise sooner.
On April 25 Fed Chairman Ben Bernanke described monetary policy as being in “more or less the right place.” Still, he promised another launch another round of bond purchases if the economy were to weaken.
Economists at major Wall Street firms surveyed after learning that U.S. employers added a surprisingly meager 115,000 jobs in April saw about a one in three chance the Fed will start another bond buying initiative.
In recent weeks several Fed officials have come out quite strongly against undertaking further monetary easing, although one, Chicago Fed President Charles Evans, has argued for the Fed to do more.
Kocherlakota, whose views tend toward the inflation-fighting hawkish end of the policy spectrum, is among a minority pushing for the Fed to withdraw accommodation as soon as this year. (For a graphic of Fed hawks and doves, please see: reut.rs/IJznnB )
The Fed has bought $2.3 trillion in long-term securities over the past several years to push down borrowing costs. Its most recent bond-buying program, known as Operation Twist, is slated to last through June.
Kocherlakota also stressed the importance of transparency to monetary policy effectiveness, and urged the central bank to take further steps to clarify its stance.
Communicating policy helps anchor inflation at the Fed’s 2 percent target and holds the central bank publicly accountable for any gaps between its guidance and its actions, he said.
It also gives the Fed more control over policy even when the overnight lending rate between banks, its main policy lever, is near zero.
“The rate can’t get any lower,” Kocherlakota said. “But one way to vary monetary stimulus today is to influence the public’s expectations of how long the fed funds rate will stay so low - and how fast the fed funds rate will rise when it does start to rise.”
Separately, Philadelphia Fed President Charles Plosser, an inflation hawk at the U.S. central bank, did not comment specifically on monetary policy on Wednesday.
Instead he argued the United States “has a history of being remarkably resilient,” and noted that GDP growth picked up in the second half of last year despite a series of economic shocks such as Japan’s natural disaster and the U.S. “debt ceiling fiasco.”
“To be sure, growth is not robust. But growth in the past year has continued despite significant risks and external and internal headwinds,” Plosser said at a conference called Reinventing Older Communities, hosted by the regional Fed bank.
With reporting by Mark Felsenthal in Washington, Jonathan Spicer in Philadelphia and Ann Saphir in Chicago; Editing by Andrew Hay