Fed hawks warn that near-zero rate policy could spark inflation
(Reuters) – Two top Federal Reserve policymakers expressed discomfort on Thursday with the U.S. central bank’s easy monetary policy, in comments suggesting Fed Chairman Ben Bernanke may face more dissent this year.
In remarks that stamped her as a hawk on the Fed’s policy-setting committee, Kansas City Federal Reserve President Esther George warned that the Fed’s near-zero interest-rate policy – aimed at boosting the economy – could spark inflation.
“A prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the 2 percent inflation goal in the future,” she said in her most extensive remarks in a year on policy.
“Monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it,” she said in a speech in Kansas City.
That stance is hardly representative of other influential officials at the central bank, including Bernanke and the vice chair, Janet Yellen.
Their view was more closely captured by comments from Narayana Kocherlakota, who noted inflation was forecast to remain below the central bank’s 2 percent target for the foreseeable future, even by the Fed’s own estimates.
“This forecast suggests that, if anything, monetary policy is currently too tight, not too easy,” he said in remarks in Minneapolis.
Last month, the Fed voted to keep up asset purchases at an $85 billion monthly pace to lower borrowing costs and spur hiring. It said it would continue that policy, called quantitative easing, until it saw substantial improvement in the labor market outlook.
U.S. central bankers also pledged to hold interest rates near zero until unemployment falls to 6.5 percent, provided inflation does not threaten to rise above 2.5 percent.
George will cast her first vote this month on monetary policy since taking the helm at the Kansas City Fed in October 2011, while Kocherlakota is not a voter this year.
