Fed official attacks market’s reaction
By James Politi in Washington
Published: August 17 2010 19:48 | Last updated: August 18 2010 01:48
A senior Federal Reserve official on Tuesday said the negative market reaction to the central bank’s move towards an easier monetary policy last week was “unwarranted”, because the US economy was not in worse shape than investors thought before the decision.
Narayana Kocherlakota, Federal Reserve Bank of Minneapolis president, said the central bank’s statement last week had a bigger impact on financial markets than he expected.
“My interpretation is that the federal open market committee action led investors to believe that the economic situation was worse than they, the investors, had imagined. In my view this reaction is unwarranted,” Mr Kocherlakota said at a speech in Marquette, Michigan, adding that the Fed’s move was based on publicly available data.
A week ago, monetary policymakers at the Fed chose to begin reinvesting proceeds from expiring mortgage-backed securities held by the central bank, in order to prevent a natural shrinking of its $2,300bn (€1,785bn, £1,478bn) balance sheet that would have constituted a small tightening of monetary policy.
Although the shift was based on a meaningful downgrade in the economic outlook of Fed officials since their last meeting in June, many investors took it as a sign of something worse, causing Treasury yields to fall sharply.
Mr Kocherlakota did not play down the tough conditions facing the US economy. He said the unemployment rate would remain at 8 per cent into 2012, pointing to a structural shift in the US labour market since the recession that even easy monetary policy was not capable of correcting.
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