What are the forces moving the Minnesota economy? Adam Belz tries to identify the trends and show the connections between Minnesota and the larger U.S. and global economies. You can connect with him on Twitter: @adambelz

Minneapolis Fed chief calls for clarity from central bank

Posted by: Adam Belz under Business trends, Economics Updated: June 24, 2013 - 12:42 PM

As markets continued to fall Monday on fears of the eventual end of the Fed’s $85 billion-a-month bond-buying program, Minneapolis Fed chief Narayana Kocherlakota called for more clarity about how the Fed will behave as the economy continues to recover.

In a conference call with reporters, Kocherlakota said the Fed has “provided insufficient detail about how its policy strategy will play out when the recovery is more advanced.” And so he offered some suggestions on Monday. His statement reflected his opinions, he said, and not necessarily those of his colleagues.

He said the Fed should continue to buy mortgage-backed securities at least until the unemployment rate falls below 7 percent, and should keep interest rates near zero until the unemployment rate has fallen below 5.5 percent, so long as the medium-term outlook for inflation remains below 2.5 percent.

This is consistent with what the Fed said last week, but the non-voting member of the Federal Open Market Committee believes last week’s FOMC statement was incorrectly interpreted as more hawkish than it is.

The problem, he said, is that the Fed doesn’t emphasize strongly enough what it said in the second clause of the first sentence of the fifth paragraph of its statement: “…the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

“Highly accommodative” is a phrase that describes Fed monetary policy over the past few years – a policy of very low interest rates.

“We bury the lede on this,” Kocherlakota said. “We have to bring that forward and hammer it every time we talk about policy, that that’s our guiding principle…Communication is about emphasis as much as what you’re doing.”

Jon Hilsenrath, the Wall Street Journal’s economics correspondent, asked if the market’s reaction to last week’s statement is evidence that the economy is hooked on easy monetary policy. Kocherlakota dismissed the drug addiction analogy.

“I never understood the addiction analogy that is popular with reporters,” Kocherlakota said. “I think of us as providing a coat for the economy. It’s still wintry conditions. I know it feels like it should be May by now, and we should be able to take off the coat, but we well know in Minneapolis that that doesn’t always happen, and you should keep your coat on when it’s cold out.”

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