World Economy

Federal Reserve Taking ‘Unacceptable’ Risks

Federal Reserve Taking ‘Unacceptable’ RisksFederal Reserve Taking ‘Unacceptable’ Risks

The Federal Reserve is taking “unacceptable” inflation risks, raising the specter of Japanese-style deflation, Minneapolis Fed President Narayana Kocherlakota said Friday.

Kocherlakota, who dissented from Wednesday’s Fed statement, said the central bank’s communicated intent to gradually raise rates “creates an unacceptable downside risk to inflation and inflation expectations,” CNBC reported Friday.

The central banker pulled no punches in assessing what he sees as the danger in the Fed’s policy.

“In my assessment, the FOMC’s (Federal Open Market Committee) failure to respond to weak inflation runs the risk of creating a harmful downward slide in inflation and longer-term inflation expectations of the kind that we have seen in Japan and Europe,” he said in a statement explaining his dissent.

He cited three factors for his decision: inflation having run below the Fed’s target for more than 30 months; a projection that it will remain below target for the next few years; and a lack of confidence in the stability of longer-term inflation rates.

Kocherlakota said the Fed should have announced it will keep its rate targets unchanged as long as the near-term inflation outlook stays below 2 percent. In both October and November, he said it would be “inappropriate” to raise interest rates next year, as most expect will happen.

He also said the Fed should make clear it would be willing to renew quantitative easing, or QE, to bring inflation back to targeted levels.

Last week the Minneapolis Fed said Kocherlakota would step down when his term ends in early 2016. His successor will be an alternate member of the FOMC that year.

  TARP Bailout

US bank Ally Financial, rescued during the 2008 financial crisis, has exited the TARP bailout program, the Treasury Department said Friday, AFP reported.

The Treasury said it had sold its remaining stake of 54.9 million shares in Ally for $23.25 per share, gaining $1.3 billion for taxpayers.

The sale marked the Treasury’s last major investment in the Troubled Asset Relief Program (TARP), it said in a statement.

According to the Treasury, taxpayers recovered $19.6 billion on the investment in Ally, the former GMAC, the auto-financing arm of General Motors that was sold off and became a bank holding company during the financial crisis.

Taxpayers have netted a profit of roughly $2.4 billion on the original $17.2 billion investment in the automotive financial services provider, the Treasury said.

“We are appreciative of the investment the US Treasury made in Ally and their understanding of how important available financing was to the US auto recovery,” said Michael Carpenter, chief executive of Ally, in a separate statement.