Jan 11 - In discussing his forecast for the future of the U.S. economy during a speech on Jan. 10, 2013, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said he believes monetary policy is currently too tight, not too easy.
"My outlook for the next two years can be summarized as being an ongoing modest recovery," said Kocherlakota. "First, I see output as continuing to grow slowly — at around 2.5 percent in 2013 and around 3 percent in 2014. Note that this growth will do little in terms of returning the economy to the historical trend. Consistent with this slow output growth, I expect unemployment to continue to fall only slowly, down to around 7.5 percent in late 2013 and around 7 percent in late 2014. This level of unemployment will continue to constrain wage growth. Consequently, inflation pressures will remain subdued, as I expect PCE inflation to be only 1.6 percent in 2013 and 1.9 percent in 2014.
"Congress has charged the Fed with making monetary policy to achieve two Main Street objectives: keep inflation close to 2 percent and unemployment low. Monetary policy tools operate with a lag of a year or two. These lags mean that the FOMC’s policy decisions are based on how it expects the economy to perform over the medium term," said Kocherlakota. "My own forecast, conditional on the FOMC’s current monetary policy stance, is that inflation will run below the Fed’s target of 2 percent over the next two years and the unemployment rate will remain elevated. This forecast suggests that, if anything, monetary policy is currently too tight, not too easy."