Kocherlakota Throws in His Two Cents

Narayana Kocherlakota (FRB-Minn) serves as an alternate voting member of the FOMC. He voted for the course of action outlined in the last FOMC statement dated June 19. However, like a juror having some second thoughts, he posted a note clarifying his position today. He seems to be nitpicking, but that’s what happens when members of the FOMC are allowed to speak freely. Free speech is allowed in our country, but too much of it from the Federal Open Mouth Committee tends to confuse the markets rather than to provide the clarity that Fed officials claim they are striving to achieve with their more transparent communication policy.

In fact, Kocherlakota's main complaint is that the FOMC’s latest “communications do leave the public with large amounts of residual uncertainty about the Committee’s likely course of policy choices when the recovery is more advanced. The Committee could better achieve its policy goals if it were to reduce this uncertainty through communicating more information about its likely reactions to additional economic eventualities.”

Needless to say, he has some specific suggestions. In particular, he would keep the federal funds rate near zero until the unemployment falls not only to 6.5% (as the FOMC decided at the end of last year) but also until it falls below 5.5%. He concludes:

There is a difference between FOMC communications, including recent ones, and the policy strategy described above: The latter provides more detail about the likely reaction of monetary policy to key economic eventualities. In my view, the Committee could better achieve its goals by augmenting its communications to provide the missing clarity. For example, 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. In contrast, the policy strategy that I described above says specifically that the FOMC will keep the fed funds rate extraordinarily low over that time frame (as long as the inflation conditions are satisfied). This 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.

Is that clear?