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Dissenting Fed member pledges unity but makes different reading of data available

Wednesday, August 31st 2011 - 09:00 UTC
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Narayana Kocherlakota says “the fundamentals in this country are very strong” Narayana Kocherlakota says “the fundamentals in this country are very strong”

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota signalled he would not attempt to annul the Fed’s commitment to keep interest rates near zero through mid-2013.

“I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future -- and this ability has certainly proved very useful in the past three years,” Kocherlakota said Tuesday in a speech in Bismarck, North Dakota. “I plan to abide by the August 2011 commitment in thinking about my own future decisions. Of course, the case for any additional easing would have to be made on its own merits.”

On Aug. 9, Kocherlakota joined two other regional bank presidents, Charles Plosser of Philadelphia and Richard Fisher of Dallas, in posing the most opposition to a Fed decision since 1992. They dissented from the Federal Open Market Committee’s pledge to hold interest rates in a range of zero to 0.25% until at least mid-2013, preferring instead to maintain a commitment to do so for an unspecified “extended period.”

Kocherlakota said that the most dissent in Fed Chairman Ben Bernanke’s tenure resulted from differing interpretations of incoming economic data.

“It’s unusual to see an increase in inflation and a fall in unemployment to occur when GDP growth is so sluggish and when the outlook for real GDP growth has slipped so much,” he said. “It is hardly surprising that there might well be some disagreement about the appropriate monetary policy response to this conflicting mix of information.”

A few Fed policy makers this month favoured more aggressive action to stimulate the economy and lower unemployment, minutes of their meeting released showed.

Those members, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the last FOMC meeting to hold its key interest rate at a record low until mid-2013.

“Given the data flow I’m aware of, I do not see the need for further accommodation,” Kocherlakota told reporters after the speech. Such a move would only be warranted if unemployment began to rise further or if inflation retreated. “After that, I haven’t thought through which of the options” for further stimulus would work best, he said, adding that there are “definitely tools left in the Fed’s toolkit.”

By changing its statement to say interest rates will remain near zero until at least mid-2013 even as unemployment has dropped and inflation picked up, Kocherlakota said he was concerned the Fed was failing to communicate its objectives. “That inconsistency does suggest there’s a gap between our communication and the committee’s actions,” he said.

In response to questions from the audience, the regional Fed chief said he agreed with Bernanke’s Aug. 26 speech in Jackson Hole, Wyoming, that the US would not have permanent scars from the recession that ended in June 2009.

“The fundamentals in this country are very strong,” Kocherlakota said. “We will get back to growing the way we’re used to in the US” though there will be a “transition process and that will take some time”.

Kocherlakota offered a partial explanation for his dissent in an Aug. 12 statement.

“I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010,” when the Fed launched a second round of quantitative easing, Kocherlakota, 47, the Fed’s youngest policy maker, said in the statement released three days after the FOMC meeting.

Kocherlakota said that he expects inflation to increase, averaging about 2% per year over 2011 and 2012, as measured by the personal consumption expenditures index excluding food and energy, or core inflation.

The Commerce Department reported yesterday that its personal consumption expenditures index rose 2.8 percent from a year earlier. Core inflation rose 1.6 percent from July 2010.

Kocherlakota said that many monetary policy rules would look at a lower unemployment rate and higher inflation rate and “would recommend that the FOMC not ease policy further and in fact consider reducing the level of monetary policy accommodation.”

“That recommendation -- don’t ease further if you’re doing better on your mandates -- makes sense to me,” he said.

Kocherlakota, a former academic who has led the Minneapolis Fed since October 2009, also offered a word of praise for Bernanke in his speech.

“Chairman Bernanke strongly welcomes the airing of disparate views within the meeting,” Kocherlakota said. “He clearly believes -- as I do -- that the United States has a decentralized central bank because we will get better monetary policy if decision-making is grounded in a wide range of views. I think that the chairman should be applauded for this approach to policymaking”.

Categories: Economy, United States.

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