LONDON – Minneapolis Federal Reserve President Narayana
Kocherlakota does not believe that further quantitative easing would
help boost inflation much, even though he would like this to be the
case.

Speaking to the European Economic and Finance Centre here,
Kocherlakota said that the impact on inflation of further QE was likely
to prove muted:

“If QE were to have an upward tick effect on inflation
expectations, that would be desirable, at this point in time. I don’t
see QE has having a positive or negative impact… The effects of QE
would be muted on inflation.”

“Having higher expected inflation over the short-term could offer
some stimulus to the economy. How much? I would hesitate to put a number
on it at this stage”

The Fed official also refused to be drawn on whether he hoped QE
would bring about dollar depreciation, adding that he thought QE had
little effect on exchange rates.

Looking further forward, Kocherlakota said that the Fed would be
likely to raise interest rates before withdrawing quantitative
tightening.

“My own guess is that, based on what we’ve seen in the past on this
topic, we’re unlikely to see significant amounts of quantitative
tightening until interest rates move.”

Kocherlakota said that interest rate movements were a more
effective monetary policy tool in normal circumstances and would be
deployed if the Fed had more headroom to do so.

“It is fair to say that QE is not a tool that the Fed would be
using it if it could lower interest rates. This is not a tool that is
effective as lowering interest rates,” he said.

“That said, we’re thinking about what tools we do have available
and how best to use them,” he added.

The official also sought to cool fears about Washington’s ability
to repay its debt as he batted away a question about whether markets may
soon begin to worry about the sustainability of the US federal budget,
but getting the budget in order was an issue for the longer run.

“I think (Fed) Chairman Bernanke has spoken about this. In the
short-run I don’t think it’s something we need to worry about. In the
longer-run there has to be a commitment on the part of the fiscal side
to get its house in order,” he said.

“Whether that takes the form of cutting expenditure or raising
taxes, that has to be decided. Eventually that has to flow back to our
job and making sure inflation is under control. That fiscal discipline
issue is a longer-term question,” he added.

Turning to the Fed’s role in monitoring systemic risk, Kocherlakota
said that the Fed is taking on a more regulatory role, adding that it is
the ‘natural’ institution to do so.

“I think that in the crisis, there was a useful synergy between our
supervisory and regulatory functions. There is a tremendous amount of
expertise in the Federal Reserve system that makes a natural agency for
dealing in a climate of systemic risk and oversight,” he said.

–London Bureau; Tel: +44207862 7492;
email: william.wilkes@marketnews.com

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