Kocherlakota Blames Fed for Slow Recovery in Blunt Parting Words

  • Outgoing Minneapolis Fed chief says inaction was deliberate
  • Suggests his colleagues should ditch 'Taylor Rule' framework

In his final public remarks as president of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota criticized the central bank’s actions since the 2008 financial crisis and warned his colleagues against returning to the pre-crisis framework for setting monetary policy.

Kocherlakota, who has been pushing for additional stimulus this year while others on the policy-setting Federal Open Market Committee have been preparing to tighten, said in the text of a speech Friday in Philadelphia that the FOMC’s policy choices since the crisis "were designed to keep both employment and prices needlessly low for years."

He cited projections by himself and his colleagues in 2009 for unemployment and inflation that showed both were expected to be far from the Fed’s goals of maximum employment and 2 percent inflation three years later in 2012.

"Each participant’s forecast is based on what that participant sees as being appropriate monetary policy," Kocherlakota said. Therefore, "a participant’s projection is best viewed as a description of his or her goals for the evolution of inflation and unemployment."

This behavior was based on a framework that predominated policy-making in the pre-crisis era known as the Taylor Rule, which penalized deviations of the Fed’s benchmark federal funds rate from historical levels, he said. Going forward, the FOMC should adopt a strategy "that is a lot more responsive to the Committee’s best medium-term projections of inflation and output gaps" in order to engender a faster return to the Fed’s mandated goals, he added.

Kocherlakota steps down Dec. 31 to join the faculty at the University of Rochester and has recused himself from the FOMC’s upcoming meeting on Dec. 15-16. Neel Kashkari, a former aerospace engineer who went on to stints in investment banking, asset management and politics, last month was named his successor.

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