The Federal Reserve's transparency campaign swept into Minnesota on Tuesday, as Minneapolis Fed President Narayana Kocherlakota delivered his first-ever media briefing on the state's economy.
Speaking at the headquarters of the Federal Reserve's Ninth District in downtown Minneapolis, Kocherlakota outlined the state's better-than-average progress recovering from the Great Recession and forecast a slow national recovery. He said he expects real national gross domestic product to grow at an annual rate of between 2.5 percent and 3 percent in each of the next two years, slightly faster than the 1.6 percent growth in 2011.
The biggest news from the briefing, however, may be that it occurred at all. Under Fed Chairman Ben Bernanke, the once-secretive interest rate-setting body has been airing its views more directly about policy decisions and the direction of the economy -- letting the public and market movers peek behind the curtain in Oz.
Kocherlakota nudged the Fed's new open-door policy a crack further, saying he thinks the Fed "should be much more clear" about the trade-offs between unemployment and inflation -- the Fed's two mandates, which are often in conflict.
Kocherlakota said his forecast is that national unemployment will fall to about 7.7 percent by the end of the year and drop to 7 percent by the end of 2013. Inflation, including food and energy prices, will hover around 2 percent this year and rise to 2.3 percent next year "as monetary policy remains highly accommodative."
Minnesota's economy may be struggling, but it's "further along the recovery path than the national recovery," Kocherlakota said, noting that at 5.7 percent, the state's unemployment rate is significantly lower than the nation's at 8.5 percent.
The next key reading on the state's employment picture will be new job numbers that come out March 1.
Minnesota's economy is recovering faster than most, Kocherlakota said, largely because the state's workforce is more highly educated, buffering workers from the worst ravages of the recession, and the state's real estate market didn't suffer the extremes other areas did when the housing bubble burst.
Still, the damage the collapse inflicted on household balance sheets, consumer demand and creation of new businesses is impeding faster growth, he said.
Kocherlakota made headlines last year as one of three hawks on the Federal Open Market Committee (FOMC), the central bank's main policymaking arm that sets targets for short term interest rates. He was public about his dissenting vote last summer when the FOMC decided to hold interest rates near zero through at least mid-2013, taking the unusual step of posting a videotaped statement on the local Fed's website to explain his decision.
Last month the Fed decided to extend its near-zero position 18 months through at least the end of 2014, keeping borrowing costs low.
Kocherlakota has rotated out of his voting position on the FOMC. But he's a "pro-transparency person," he said Tuesday in explaining his decision to hold a briefing.
Kocherlakota was concerned last year that the Fed was keeping interest rates ultra-low at a time when inflation was rising and unemployment was falling. Falling unemployment generally pushes up inflation as workers eventually demand higher wages and spend more.
The trade-off between managing unemployment and inflation is more challenging than usual in the current recovery, he said, because there are so many long-term unemployed people. The balance required for getting the long-term unemployed back into jobs may be different than what's required to bring down short-term unemployment.
Kocherlakota said he fears the public will lose trust in the central bank if, after keeping interest rates extraordinarily low, inflation rises beyond the Fed's now-explicit target of 2 percent, and some observers agree.
"That's a real risk," Wells Fargo senior economist Scott Anderson said.
There are risks in general with pulling back the curtain to see the wizard, Anderson said.
"Now they're going to see the sausagemaking a little more," he said. "They might just find out the Fed doesn't have a perfect track record. Once that credibility is gone, it's hard to get it back."
Randall Kroszner, an economics professor at the University of Chicago's Booth School of Business and a former Fed governor, said he's not sure how useful the increased communication is. The Fed is using Sweden's central bank as a model, he said.
"Since the crisis has happened since early 2009, it's not clear that the markets have really found the Swedish central bank's pronouncement of the direction of interest rates to be very informative," Kroszner said. "The jury is out on how this is going to work in the United States."
Jennifer Bjorhus • 612-673-4683
