Minneapolis Fed President Warns About Deflation Again

MINNEAPOLIS (Minneapolis Star Tribune/TNS) -

Minneapolis Fed President Narayana Kocherlakota on Friday again warned about the risk of deflation and said the central bank’s failure to maintain its inflation target had become “unacceptable.”

Kocherlakota was one of three members of the Fed’s policymaking committee to dissent from the policy stance it took on Wednesday, in which it signaled interest rates could begin to rise by next summer.

Kocherlakota for more than a year has said the central bank should maintain its “accommodation” stance, or one in which rates remain at or near zero, until the economy becomes stronger. One sign of such strength, he has said, would be for inflation to reach at least 2 percent, the low end of a range previously set by the Fed policy committee.

In a statement explaining his dissent, Kocherlakota noted that inflation has been below 2 percent in the U.S. for 30 months and that staffers of the policy committee project it will remain below that target for “the next few years.” He also noted the policy committee recently has not been able to project stability in inflation expectations.

The committee’s “failure to respond to weak inflation runs the risk of creating a harmful downward slide in inflation and longer-term inflation expectations of the kind that we have seen in Japan and Europe,” Kocherlakota said in the statement. “I see this risk to credibility of the inflation target as unacceptable.”

He sounded a similar warning when he explained a dissenting vote after the policy committee’s meeting in October.

Deflation, and even low inflation, is seen by some economists as an impediment to economic growth because it leads consumers and businesses to delay spending in the expectation of lower prices down the road.

Some economists, however, argue that consumers have become accustomed to deflationary trends for certain products like electronics, and still spend money on them.

Two other regional Fed leaders also dissented at Wednesday’s policy meeting. Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser both indicated the central bank may need to raise interest rates sooner than it signaled.

Kocherlakota recently announced that he will step down from leadership of the Minneapolis Fed when his five-year term ends next year.