ST LOUIS, March 20 (Reuters) - The U.S. Federal Reserve has successfully used easy monetary policy to keep inflation from falling too low, but it is powerless, on its own, to boost employment much beyond the current low level, a top Fed official said on Tuesday.
Only non-monetary policies such as hiring subsidies can help offset the uncertainty and adverse credit conditions that are keeping companies from adding jobs, Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, said in a summary of remarks prepared for delivery at Washington University in St. Louis,
That said, hiring subsidies will only work to boost jobs if the Fed continues to deliver easy monetary policy, he added.
“In terms of employment, there are limits to what monetary policy can achieve on its own,” Kocherlakota said.
The U.S. central bank has kept interest rates near zero for more than three years, and in January it said it planned to keep them there through late 2014.
The Fed also bought $2.3 trillion in long-term securities to help push borrowing costs down further and pull the economy free from the effects of the Great Recession.
Kocherlakota’s speech, his first since November, suggests the chief of the smallest regional Fed bank takes a dim view of further central bank easing designed to bring down unemployment.
Inflation has averaged near the Fed’s 2 percent goal since the Great Recession, but unemployment is still high, registering 8.3 percent in February.
While the Fed has been better at achieving its price stability goal than its goal of maximum employment, Kocherlakota said, the central bank ”is performing about as well as it can on both mandates.
That’s because monetary policy can help reverse job losses that come from shocks that force households to pull back on spending, but not from so-called labor demand shock, in which firms pull back on hiring due to uncertainty or tight credit conditions, Kocherlakota said.
“Non-monetary policies specifically designed to stimulate the demand for workers (such as government subsidies for hiring) can offset some of the employment loss due to the labor demand shocks, but only if accompanied by monetary easing,” he said. “Monetary and non-monetary policy must work in concert to reduce the impact of a decline in labor demand; neither can do it alone.”
Kocherlakota, who does not vote this year on the Fed’s policy-setting panel, is on the hawkish end of the policy spectrum at the U.S. central bank, typically emphasizing the threat of high inflation over the dangers of high unemployment.
Rosier data so far this year, including falling unemployment and somewhat better housing data, has prompted traders to temper expectations for more bond-buying by the Fed, known as quantitative easing, with many betting the Fed’s next move will be to start raising rates by mid-2013, more than a year ahead of the timetable suggested by the Fed.
Yet Fed Chairman Ben Bernanke and others have said more bond purchases remain an option, and have warned about removing stimulus too soon.
“You need to be attentive to where the economy is and not move to quickly to reverse the policies that are helping the recovery,” Bernanke told students on Tuesday at George Washington University in the first of a four-part lecture series.