U.S. inflation has remained consistently below the Federal Reserve's 2% inflation target and is forecast to continue doing so, while the broader economy is still "some way" from full employment, Minneapolis Fed President Narayana Kocherlakota said Friday.
In a speech primarily focused on community banking, Mr. Kocherlakota nonetheless offered some flavor of the economic views that have turned him into one of the most dovish members of the central bank's policy-setting Federal Open Market Committee.
While he did not speak to his desired path for monetary policy specifically, his discussion of the Fed's missed objectives made it clear he supports keeping official borrowing costs near zero, where they have stood since December 2008, for the foreseeable future.
"The FOMC is still a long way from meeting its targeted goal of price stability," Mr. Kocherlakota told the Independent Community Bankers of Minnesota. "I see labor markets as remaining some way from meeting the FOMC's goal of full employment."
Unemployment has fallen sharply from a post-recession peak of 10% in October 2009 to 6.2% last month. However, that is still well above the Fed's long-run forecast range of 5.2% to 5.5%. The Fed's preferred inflation measure, Mr. Kocherlakota noted, has averaged just 1.6% since the start of the recession.
What's the problem with low inflation?
"A persistently below-target inflation rate is a signal that the U.S. economy is not taking advantage of all of its available resources," Mr. Kocherlakota said. "If demand were sufficiently high to generate 2% inflation, the underutilized resources would be put to work."
He added: "There are many people in this country who want to work more hours, and our society is deprived of their production."
In addition to keeping rates at rock bottom lows, the Fed has bought over $3 trillion in Treasury and mortgage bonds to support growth. It has been gradually winding down its latest round of bond buys this year, and is expected to complete them in October.
On the subject of community banks, Mr. Kocherlakota said new financial regulations could impose a significant financial burden on smaller institutions. He called for a more "tailored" supervisory approach that might exempt these banks from some of the more onerous elements of compliance.
"Supervisors could concentrate on a smaller number of activities that we believe are correlated with bad outcomes," he said. "[They] could choose to focus on rapid loan growth, high lending concentrations, specific high-risk types of lending and wholesale funding strategies and skip some of the more detailed reviews."
Write to Pedro Nicolaci da Costa at Pedro.DaCosta@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
August 15, 2014 11:15 ET (15:15 GMT)
Copyright (c) 2014 Dow Jones & Company, Inc.