Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, believes the central bank needs to lower interest rates even more to boost economic growth.
Workers, businesses and taxpayers are seeking safer assets, even as the supply of safe assets dwindles.
“The increase in asset demand, combined with the fall in asset supply, implies that households and firms spend less at any level of the real interest rate—that is, the interest rate net of anticipated inflation,” Kocherlakota explained.
He added, “Despite its actions, the FOMC has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I’ve described.”
Keeping in line with its open-ended third round of quantitative easing program, the Federal Reserve has kept short-term interest rates near zero as well as continued monthly purchases of Treasurys and agency mortgage-backed securities.
“Indeed, the low real yields on long-term TIPS bonds suggest to me that these changes are likely to persist over a considerable period of time—possibly the next five to 10 years. If this forecast proves true, the FOMC will only meet its congressionally mandated objectives over that long time frame by taking policy actions that ensure that the real interest rate remains unusually low,” the Minneapolis Fed president stated.
