“The Federal Reserve should set a plan to keep short-term interest rates near zero until the unemployment rate has fallen below 5.5% or the inflation rate tops 2.25%, Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, said Thursday. This “liftoff plan,” he added, was an alternative to the proposal from Charles Evans, president of the Chicago Fed Bank, in which the central bank would commit to keeping rates exceptionally low until unemployment falls below 7%, only stopping if inflation rises to 3%. In a speech in Ironwood, Mich., Kocherlakota remarked that the Fed would be satisfying its stable-inflation mandate as long as its outlook for inflation over the next two years is between 1.75% and 2.25%, and longer-term inflation expectations are stable. He noted that the medium-term outlook for inflation has not risen above that level for 15 years. Kocherlakota also said he doubted that the Fed could stimulate the economy by tolerating higher inflation. Many households would only save more if inflation increased because of worries that their wages would not keep up with higher prices.” (MarketWatch)
His doubts are not unfounded.
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