Narayana Kocherlakota stood alone once again on Wednesday, solidifying his reputation as the most dovish member of the Federal Open Market Committee.
The president of the Federal Reserve Bank of Minneapolis said the central bank should continue the asset purchase program known as quantitative easing and keep the federal funds rate low at least until the one-to-two-year inflation outlook returns to 2 percent. He was the only member of the committee to take that position.
Inflation, running about 1.5 percent according to the Fed's key measure, is still too low, Kocherlakota has argued.
"He was looking for more of a continued focus on low inflation, that was the reason for his dissent," said Craig Bishop, manager of fixed income strategies for RBC Wealth Management. "Certainly that remains warranted."
Kocherlakota plans to release a statement explaining his dissent Friday, but his speeches in recent months have signaled that he believes low inflation is as much of a problem as high inflation, because it creates doubt among households and businesses that the Fed is truly aiming for its 2 percent inflation benchmark.
"In my view, inflation below 2 percent is just as much of a problem as inflation above 2 percent," Kocherlakota said in a speech in Billings, Mont., two weeks ago.
Kocherlakota, a former University of Minnesota professor who grew up in Winnipeg, has undergone a transformation since he took over the Minneapolis Fed in 2009.
Initially considered an interest-rate hawk, he said in 2010 that high unemployment was largely the result of a mismatch between workers' skills and available jobs, not something the Fed could cure with low interest rates.
His view changed, however, when he decided high rates of joblessness were the result not of a skills mismatch but of a weak economy, something interest rates can theoretically help combat by stimulating borrowing and spending.
"His stance on monetary policy has shifted 180 degrees since he has been president of the Minneapolis Federal Reserve," said Scott Anderson, chief economist for Bank of the West. "Today, Kocherlakota is the poster child for guarding against low inflation and continuing quantitative easing policies."
Kocherlakota was not a voting member of the Fed's monetary policy-setting committee in 2013. When he became one earlier this year, he dissented at his first opportunity, arguing the Fed was not setting clear enough expectations for the public about when it will raise interest rates.
Lack of clarity appears to be his main objection to Wednesday's statement, in which the Federal Open Market Committee said it "likely will be appropriate to maintain" low interest rates "for a considerable time," depending on the inflation outlook and other economic data.
Kocherlakota believes the committee should commit to keeping interest rates low in order to achieve 2 percent inflation in two years. Low interest rates should drive inflation upward.
"The lack of a public timeline for a goal can sometimes lead to a lack of urgency in the pursuit of that goal," he said in Montana on Oct. 16. "I believe that if the FOMC publicly articulated a reasonable time benchmark for achieving the inflation goal, the committee would be led to pursue its inflation target with even more alacrity."
