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October 23, 2014

Mpls. Fed chief: interest rates should stay low until unemployment falls to 5.5%

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota raised some eyebrows with a speech in Ironwood, Michigan, Thursday. Kocherlakota says — as long as inflation is not a problem — interest rates should stay low until unemployment falls to 5.5 percent from the current national rate of just over eight percent.

The speech surprised more than one economist because within the Fed Kocherlakota has the reputation of backing rate hikes to guard against inflation. Economists who spoke to Marketwatch called it “perplexing,” “a dramatic shift,” and “like something out of Saturday Night Live.”

Their befuddlement stems partly from the fact that as recently as May Kocherlakota was suggesting higher rates were on the horizon.  Now he says keeping rates down where they are now, even as the economy recovers, will reassure consumers and encourage them to take out loans for homes or cars. That’s consistent with the direction the Fed signaled last week.  But his use of 5.5 percent unemployment as a benchmark goes farther than the seven percent mentioned by the president of the Chicago Fed.

You can read the full text of Kocherlakota’s speech. Or watch a video summary: