Fed's Kocherlakota: Fed Doing As Well As It Can On Mandates

NEW YORK (Dow Jones)--The Federal Reserve may be legally charged with keeping prices stable and employment as high as it can be, but the nature of recent difficulties makes it hard for the central bank to have success on the latter goal, a U.S. monetary policy maker said Tuesday.

"The Federal Reserve is performing about as well as it can on both mandates," Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said in the text of remarks to be given at Washington University in St. Louis.

"The Fed is clearly doing well on the price stability mandate" set for it by Congress, the non-voting member of the interest rate setting Federal Open Market Committee argued. But things haven't gone nearly as well when it comes to labor markets, despite a massive course of stimulus provided by the central bank. It hasn't had anywhere near the level of success because of the nature of what has wounded job markets, the policymaker said.

Zero-percent interest rates and massive balance-sheet expansion have been "unable to offset the large adverse shocks to labor demand" that have resulted from the economy's recent difficulties, Kocherlakota said. It appears "there are limits to what monetary policy can achieve on its own."

The official explained that "monetary policy can offset the impact of the product demand shocks on employment, but it cannot offset the employment loss due to the fall in labor demand and any associated slow real wage adjustment." As a result, he said, "the level of 'maximum employment' achievable through monetary policy is less than the 'full employment' of labor resources."

If the Fed has help in a situation like that, it could achieve more for the labor market. 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" as long as the Fed keeps policy relatively easy.

"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 said.

Kocherlakota's remarks were primarily academic in nature and they did not offer any forward-looking views on the economy or monetary policy. The central banker was a persistent critic of the Fed's decision last year to provide additional stimulus to the economy. Currently, markets are downgrading their once high expectations the Fed will provide additional support to the economy this year in light of improving economic data, most notably on the jobs front.