Minneapolis Fed chief dissents as rate outlook shifts

  • Article by: ADAM BELZ , Star Tribune
  • Updated: March 21, 2014 - 10:03 AM

Kocherlakota alone in dissent as the central bank altered its language for interest rate targets.

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Narayana Kocherlakota

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The president of the Federal Reserve Bank of Minneapolis was the lone dissenter Wednesday as the Fed tweaked its guidance on future interest rates.

Narayana Kocherlakota, who became a voting member of the Federal Open Market Committee this year, said part of the new statement undermines the credibility of the Fed’s commitment to move inflation toward a 2 percent target and “fosters policy uncertainty that hinders economic activity.”

The central bank also, as expected, cut its monthly purchases of U.S. treasuries and mortgage-backed securities by $10 billion to $55 billion, as it winds down the monetary stimulus program known as quantitative easing.

The Fed dropped its explicit promise to keep interest rates extremely low until U.S. unemployment falls below 6.5 percent, instead setting a threshold of “maximum employment.” It also dropped language saying extremely low interest rates will remain appropriate “for a considerable time” after the Fed’s massive bond-buying program comes to an end.

Instead, it used new language saying near-zero interest rates “likely will be appropriate ... for a considerable time after the asset purchase program ends.”

These changes, though seemingly minor, matter to Kocherlakota, an advocate for the Fed to set clear expectations who has evolved into the most dovish member of the Federal Open Market Committee.

“I think he’s just saying let’s be more explicit,” said Pete Ferderer, an economist at Macalester College in St. Paul. “It sounds like he wants to be more aggressive, he wants to be more inflationary, more pro-growth, but he’s concerned about the uncertainty of the signal that the Fed is sending.”

Kocherlakota has argued that the Fed should continue holding down interest rates until U.S. unemployment — now at 6.7 percent — falls below 5.5 percent, or until the two-year outlook for inflation rises above 2.5 percent. That framework, first put forward by Chicago Fed President Charles Evans, has come to be known as the Evans rule.

The Fed’s statement Wednesday, followed by Janet Yellen’s first news conference as Federal Reserve chairwoman, moved away from such clear thresholds.

“In the context of Yellen taking over the Fed, those signal issues are even more important,” Ferderer said.

Kocherlakota, who took over the Minneapolis Fed in 2009, has become one of the more vocal proponents of the Fed’s doing more to stimulate the economy, after being considered an interest-rate hawk as recently as 2011. He was not a voting member of the Fed’s monetary-policy-setting committee in 2013, though nonvoting members influence the policy’s joint statements.

Now he is a voting member and his keen interest in expectations — how the Fed sets them and what they should be — is coming to the fore. He didn’t comment on his dissent Wednesday, but plans to issue a statement Friday.

“He’s really big on specific, rule-based policy, so you have a rule where you set specific targets that you hit,” said Louis Johnston, an economist at the College of St. Benedict and St. John’s University.

Johnston said Kocherlakota is likely concerned that the new statement leaves open the possibility that the Fed will allow inflation to rise above the 2 percent target before driving it back down, a strategy being used in Japan to stimulate growth.

“That’s one policy that people have been advocating, that we should push inflation up and let the economy start growing faster again, and then put it back down to the 2 percent target,” Johnston said. “Kocherlakota said no, we’re not going to do that.”

In a separate set of economic forecasts, also published Wednesday, Fed officials consolidated around the view that the central bank would begin to raise short-term rates in 2015. That was the view of 13 of the 16 officials who submitted forecasts.

The steady course of Fed policy reflected the continued confidence of its officials in the economic recovery. The statement said that “growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions.” But it added that the Fed regarded its current efforts as sufficient to produce gradual improvement in the economy, reductions in unemployment and a revival in the low pace of inflation.

Predictions that the economy would grow more quickly in 2014 have not come true. Cold weather and winter storms in some parts of the country appear to have suppressed growth. Car sales, for example, fell sharply in January in the coldest parts of the country. But it is not clear whether the difficult winter is a complete explanation. Growth has repeatedly disappointed the Fed’s expectations in recent years, and officials have said that judging the impact of the cold will take time — and warmer weather.

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