Minneapolis Fed chief takes turn in the hot seat

  • Article by: ERIC WIEFFERING , Star Tribune
  • Updated: January 15, 2011 - 10:19 PM

Narayana Kocherlakota's first year as president of the Minneapolis Federal Reserve Bank proceeded smoothly in 2010 as he made the rounds of the vast Ninth Federal Reserve District, which stretches 1,800 miles from Michigan's Upper Peninsula in the east to Montana in the west.

Then came an Aug. 17 speech in Marquette, Mich., where the newest and youngest regional Federal Reserve president suggested that the nation's high unemployment rate might reflect a structural mismatch between the jobs that were available and the skills of those looking for work.

If that were the case, Kocherlakota said, the Fed "does not have a means to transform construction workers into manufacturing workers."

Kocherlakota's words, coming just months before he was to become a voting member of the Federal Open Market Committee, served as tinder for a debate already raging in policy circles and across the blogosphere. Those fearful that the Fed had already set the stage for an era of hyperinflation suddenly saw, in Kocherlakota, a kindred, conservative voice among Fed bank presidents.

Meanwhile, those worried that the Fed was not doing enough to stimulate the economy and put more people to work, reacted with alarm and, at times, derision. Nobel Prize-winning economist Paul Krugman described the notion of a mismatch as "simply bizarre" and an excuse to do nothing.

And here was the headline on a blog post from Berkeley economist Brad DeLong: "The sad thing is that Narayana Kocherlakota was supposed to be the smart one among the Minnesota economists."

Ouch.

Kocherlakota continues to think that structural unemployment could be a factor in the future, as the unemployment rate falls and the Fed weighs when to raise interest rates. But he has little interest in revisiting the reaction to his August speech. If anything, though, the experience may have better prepared him for his new role on the FOMC.

The FOMC is one of the chief monetary policymaking arms of the Federal Reserve system. It plays a key role in determining interest rates and policy actions the Fed might enact in pursuit of its three mandates: maximum employment, stable prices and moderate long-term interest rates.

The committee meets at least eight times a year. When times are good, the statements from those meetings, as well as the minutes typically released three weeks later, are read mostly by bond traders, economists and other central bankers looking for hints or clues to the future direction of interest rates and the economy.

The Fed's audience grows when times are bad, and the financial panic of 2008 and subsequent recession have brought an unprecedented level of scrutiny and debate about its response and role. FOMC meetings now have the feel of a sporting event or election, with politicians and pundits of all stripes declaring winners and losers and sounding off about the leadership and judgment of the chairman, Ben Bernanke. It's not always polite. Television commentator Glenn Beck recently described the Federal Reserve as "a big, big, if not the main cancer in the system."

Though he has been a stout defender of the interventionist role of the Fed during this recession, Kocherlakota enters this hothouse environment widely regarded as a brilliant theoretical economist but a relatively unknown quantity in terms of his views on monetary policy. His selection as the Minneapolis Fed president was seen as something of a surprise. Greg Mankiw, a Harvard economist and former chair of the President's Council of Economic Advisers, greeted the announcement with this post on his blog, "It is almost like Albert Einstein was hired to be CEO of General Electric."

Kocherlakota comes across as anything but an Ivory Tower egghead. He gave 19 speeches in 2010, many of them an attempt to clarify the role of the Fed and demystify its inner workings. The harsh reaction in many quarters to the Fed's November decision to stimulate the economy through the purchase of up to $600 billion in Treasurys is proof the Fed needs to do better communicating to a broader public, Kocherlakota said.

"How do you reach out to a broader set of people who are not engaged on an everyday basis with the Fed?" he asked. "I think we have to solve that problem."

Kocherlakota's outlook for the economy is in line with most other Federal Reserve bank presidents. He expects the economy to grow by about 3.5 percent in 2011. Inflation will tick up slightly, in the 1.5 percent to 2 percent range. He expects unemployment to remain above 9 percent in 2011, and above 8 percent through 2012.

Kocherlakota isn't the only new voter on the FOMC this year. Philadelphia Fed President Charles Plosser and Dallas Fed chief Richard Fisher also rotate into voting slots, and both have raised questions about the unintended side effects of the Fed's second round of asset-buying.

Expectations or fears that Kocherlakota might join with either or both of them in frequent formal dissents with Bernanke seem to have diminished since the fall. Kocherlakota supported the asset purchases, but he also made it clear in an interview Thursday that his preference is to build consensus within the committee.

"Dissent is a high bar for me because what you're essentially saying is that you think the committee is going in a bad direction," he said. "But if you do think that, you owe it to the public to go forward."

ericw@startribune.com • 612-673-1736

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