Kocherlakota says end of Fed QE should be focused on unemployment targets

Bank of Minneapolis president Narayana Kocherlakota has said in a note that the Fed gave insufficient policy details when it announced plans to taper off QE last Wednesday and needs to provide more guidance to reduce uncertainty.

He added that the Fed should continue with its bond buying programme until unemployment hits seven per cent and to keep rates low until it dips below 5.5 per cent.

From the note (medium term refers to one to two years ahead):

Asset purchases: The Committee should continue to buy assets at least until the unemployment rate has fallen below 7 per cent, as long as the medium-term outlook for the inflation rate remains below 2.5 per cent and longer-term inflation expectations remain well anchored.

Federal funds rate: The Committee should keep its target range for the fed funds rate at its current extraordinarily low level at least until the unemployment rate has fallen below 5.5 per cent, as long as the medium-term outlook for the inflation rate remains below 2.5 per cent and longer-term inflation expectations remain well anchored.

In both cases, I am describing thresholds, not triggers. Thus, depending on economic conditions and assessments of policy effectiveness, it may be appropriate for the Committee to buy additional assets even after the unemployment rate falls below 7 per cent. And, depending on economic conditions, it may be appropriate for the Committee to keep the fed funds rate extraordinarily low even after the unemployment rate falls below 5.5 per cent.

Kocherlakota argues that a clarification of this kind would reduce the residual uncertainty about the FOMC's course of action currently present.