Kocherlakota Says Low Fed Rates Create Financial Instability

By Joshua Zumbrun

April 18 (Bloomberg) — Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank’s low interest-rate policies, though necessary, will probably generate signs of financial instability.

“Unusually low real interest rates should be expected to be linked with inflated asset prices, high asset return volatility and heightened merger activity,” Kocherlakota said today in the prepared text of a speech in New York. “All of these financial market outcomes are often interpreted as signifying financial market instability.” He told reporters later he doesn’t see financial instability as imminent.
Fed Governor Jeremy Stein and Kansas City Fed President Esther George are among those who have voiced concerns that an extended period of low interest rates is heightening the risk of asset bubbles in markets such as junk bonds and farmland.

While George has dissented from this year’s Federal Open Market Committee decisions because of this risk, Kocherlakota is among the strongest supporters of additional monetary stimulus on the committee.

In speeches earlier this month, Kocherlakota said he sees an “ongoing modest recovery” with unemployment staying at 7 percent or more through late 2014. The slow recovery calls for “more accommodation,” he said in a speech, repeating his call to postpone consideration of any increase in interest rates. He doesn’t vote on policy this year.