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Kocherlakota Hinted at Willingness to Dissent Last Year

Fed Reserve of Minneapolis President Narayana Kocherlakota
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota. Photographer: Craig Lassig/Bloomberg

Aug. 11 (Bloomberg) -- Federal Reserve Bank of Minneapolis President Narayana Kocherlakota identified limits to Fed policy in a speech last year that suggested he might be willing to break ranks with his colleagues. On Aug. 9, he made his move.

The 47-year-old economist said in a September speech that 2.5 percentage points or more of the U.S. jobless rate is due to mismatches between workers and businesses, including location, which the Fed lacks the tools to fix. “Central bankers alone cannot solve the world’s economic problems,” Kocherlakota said.

“He’s a fairly independent thinker who is not necessarily going to fall in line with what the rest of the FOMC or the chairman might be thinking,” said Tom Welle, president of First National Bank in Bemidji, Minnesota, referring to the Federal Open Market Committee. Welle is a former chairman of the state bankers’ association.

Kocherlakota, the central bank’s youngest policy maker, joined Fed presidents Charles Plosser of Philadelphia and Richard Fisher from Dallas in posing the most opposition to a FOMC decision in almost 19 years. They dissented from the FOMC’s decision to hold interest rates near zero at least until mid-2013, preferring instead to maintain a commitment to do so for an unspecified “extended period.”

Kocherlakota has repeatedly said in public remarks this year that he’d prefer to increase the target for the benchmark U.S. interest rate by 0.5 percentage point. A “modest” boost toward the end of 2011 would be “desirable” under his baseline forecast, he said in three speeches in May.

He declined a request for an interview, according to Minneapolis Fed spokeswoman Patti Lorenzen.

Growth Rate

In a May 25 speech to the Rochester Area Chamber of Commerce in Minnesota, Kocherlakota said he expects a “disappointing” rate of growth of around 3 percent this year and unemployment that will still be “close to 8.5 percent” by December.

U.S. stocks surged today and Treasuries sank as an unexpected drop in jobless claims and higher-than-estimated earnings tempered concern the economy is slowing amid Europe’s widening debt crisis. The Standard & Poor’s 500 Index rose 4.6 percent to 1,172.64 after tumbling 4.4 percent yesterday. Treasuries halted a three-day surge, sending the yield on the 10-year note up 18 basis points to 2.32 percent.

Limits of Policy

Kocherlakota’s comments on the limits of Fed policy are in line with the views of his predecessors at the Minneapolis Fed, said Varadarajan V. Chari, a University of Minnesota economics professor who’s known the policy maker for almost 25 years.

While there are “significant differences” among Kocherlakota and former Minneapolis Fed presidents Gary Stern and Mark Willes, “they share a commitment to the idea that the latest developments in economic theory should guide thinking about monetary policy,” Chari said.

One example is the work done by Edward C. Prescott and Thomas J. Sargent in the 1970s and 1980s, Chari said. Those economists found that “monetary policy was somewhat potent perhaps in the short term, but not very potent in the long term,” the professor said. “That definitely influenced Gary Stern, Mark Willes and Narayana Kocherlakota to warn people against unrealistic expectations about the power of monetary policy.”

Career in Academia

Kocherlakota, who has led the Minneapolis Fed since October 2009, built his career in academia and is former chairman of the economics department at the University of Minnesota in Minneapolis. The Baltimore-born economist entered Princeton University in New Jersey at the age of 15 and received a doctorate from the University of Chicago at 23. He served as a staff economist at the Minneapolis Fed from 1996 to 1998 and a consultant to the bank between 1999 and 2009.

Robert E. Lucas Jr., 1995 winner of the Nobel Prize for economics, once called Kocherlakota “the best abstract theorist ever to head a Federal Reserve bank.”

Kocherlakota has written or co-written more than 30 papers. In a 2008 article in the Journal of Economic Theory, he supported “laissez-faire” as an “optimal social contract” in which “agents trade in unfettered markets with no government intervention of any kind.”

In early 2009, Kocherlakota’s name, along with other economists, appeared in an advertisement sponsored by the Cato Institute, a Washington-based research group promoting free-market policies. The ad challenged President Barack Obama’s $787 billion stimulus program, saying government spending would do nothing to improve the economy.

Asset Bubbles

Still, in a paper for an International Monetary Fund conference in April 2009, Kocherlakota concluded government has a “useful” role to play before asset bubbles form and should bail out private borrowers after a collapse like that of U.S. housing prices.

Chari said he doesn’t know why Kocherlakota supported the Fed’s pledge to keep interest rates near zero for “an extended period” at four FOMC meetings this year and then opposed the committee’s pledge to hold rates low until at least mid-2013.

Still, “a specific commitment to a specific date, regardless of what developments occur in between, is often undesirable,” Chari said. “One can make a commitment that can often undermine credibility if you don’t specify the conditions in which you would depart from that commitment.”

“I don’t know what his reasoning was, but if I had voted that way, that would be my main concern,” he said.

In his September speech, Kocherlakota said “a lot” of the nation’s jobless rate was a result of mismatches between firms and available workers -- whether due to geography, skills or demography. He suggested that the right responses might be job training or foreclosure mitigation.

The Minneapolis Fed president is scheduled to speak to reporters on Aug. 30, when he also delivers a speech to the National Association of State Treasurers in Bismarck, North Dakota.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at

To contact the editor responsible for this story: Christopher Wellisz in Washington at

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