Kocherlakota , Narayana

A top Federal Reserve official known for his dovish views on policy acknowledged on Friday that monetary policymakers may need to take financial stability risks into account when making policy choices.

But Minneapolis Fed President Narayana Kocherlakota, who has repeatedly called on the U.S. central bank to ease policy further, stopped short of saying that such risks should keep the Fed from doing whatever it can to return the economy more quickly to full employment.

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Arguably, the "large increase in yields only happened because monetary policy (QE3) had lowered yields so much," Kocherlakota said. The key question, he said, is whether that sudden rise in yields hurt overall economic growth more than the earlier decline in yields had helped. The answer, he said, is far from clear.

"There is considerable need for new theory and empirics," he concluded.

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From Market News International

Minneapolis Federal Reserve Bank President Narayana Kocherlakota said Friday that supervision is the best way for the Fed to tackle threats to financial stability, but said "residual risks" may remain for monetary policy to deal with.

Kocherlakota suggested "a framework to incorporate systemic risk mitigation into monetary policymaking" using a "mean variance framework." But he did not flesh out this suggestion, saying more theoretical work is needed.