Kocherlakota Says Fed Policy Guidance Is ‘Insufficient’Joshua Zumbrun
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, who doesn’t vote on monetary policy this year, said the central bank needs to set clearer guideposts for the outlook for record stimulus and commit to press on with monthly bond purchases at least until unemployment falls below 7 percent.
“The committee’s communications have provided insufficient detail about how its policy strategy will play out when the recovery is more advanced,” Kocherlakota said in a statement today released by the Minneapolis Fed.
Stocks and bonds have fallen since Chairman Ben S. Bernanke said at a June 19 press conference that the Fed may begin to trim its $85 billion in monthly asset purchases this year and end the buying in mid-2014 if the economy achieves the sustainable growth that policy makers have sought since the recession ended in 2009.
The Standard & Poor’s 500 Index has declined about 5 percent since June 18, the day before the Federal Open Market Committee said it will continue the current pace of bond purchase known as quantitative easing. The S&P 500 Index fell 1.1 percent to 1,574.99 at 1:48 p.m. in New York, while the yield on the 10-year Treasury rose 0.02 percentage point to 2.6 percent, an increase from 2.19 percent on June 18.
The market’s reaction to the Fed’s statement “so far is not a cause for concern,” Kocherlakota said in a phone call with reporters after releasing his statement. If yields continue to stay higher, “that would be restrictive to economic conditions” and suppress both prices and employment.
Fed presidents rotate voting on monetary policy and Kocherlakota is next scheduled to vote in 2014. Presidents do not typically issue statements and hold press briefings reacting to the FOMC statement, although they do expand on their views in speeches and in media interviews.
“It is a little unusual for a non-voting member to put out a statement,” said Michael Hanson, senior U.S. economist for Bank of America Corp. in New York. “In these times of greater transparency I suppose it’s not all that impossible to imagine.”
Fed officials attempting to clarify the Fed’s intent are “challenged between finding simple ways to communicate with the markets and comprehensive ways to communicate with the markets,” said Hanson, a former Fed economist.
Kocherlakota in 2011 voted against two decisions by the FOMC, opposing actions to add stimulus. He joined in his dissent with Philadelphia Fed President Charles Plosser and the Dallas Fed’s Richard Fisher, two of the most outspoken critics within the Fed of the central bank’s bond purchases.
In May 2012 Kocherlakota said the Fed may need to raise interest rates by the end of 2012. By September, his views changed and he said the central bank was providing insufficient accommodation to push the economy toward recovery. He attributed his shift to declining inflation and to research that suggested unemployment in the U.S. was driven by economic weakness and not structural changes in the economy.
Kocherlakota said today a phrase in the fifth paragraph of the FOMC statement is especially important: “the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
“We have to bring that forward and hammer it every time we talk about policy,” Kocherlakota said to reporters.
Kocherlakota said today the end of bond buying should be tied to a threshold for the unemployment rate.
“The committee should continue to buy assets at least until the unemployment rate has fallen below 7 percent,” he said. The purchases should continue “as long as the medium-term outlook for the inflation rate remains below 2.5 percent and longer-term inflation expectations remain well anchored,” he said.
Kocherlakota declined today to give a timetable for trimming monthly purchases, saying only “you could easily see tapering as you come in on that 7 percent marker” for unemployment.
Kocherlakota has repeatedly said the Fed should use better communications to provide more stimulus to the economy. He repeated his call for the central bank’s target interest rate to remain near zero at least until unemployment has fallen below 5.5 percent. The FOMC has pledged to keep the rate low until unemployment reaches 6.5 percent.
“The committee has not described how it will set its fed funds rate target when the unemployment rate has fallen below 6.5 percent but remains above 5.5 percent, a period of time that I currently expect to last about two years,” Kocherlakota said. “Additional clarity about future policy actions will tend to push downward on a variety of market interest rates and provide needed current stimulus to the economy,” he said.