Why Minneapolis Fed President Kocherlakota disagrees with the FOMC

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Why Minneapolis Fed President Kocherlakota disagrees with the FOMC (Part 2 of 6)

(Continued from Part 1)

The president of the Federal Reserve Bank of Minneapolis

Narayana Kocherlakota is an American economist and the 12th and current president of the Federal Reserve Bank of Minneapolis.

In January 2011, Kocherlakota contested the idea that the Federal Reserve caused the housing bubble in the 2000s. The housing bubble, which was the result of Americans with the poorest credit being leant money to purchase houses they couldn’t afford, impacted the U.S. economy badly. Broad market ETFs like the SPDR S&P 500 (SPY) and the iShares S&P 100 (OEF), real estate ETFs like the Vanguard REIT Index ETF (VNQ), and banks like Citigroup Inc. (C) and Bank of America (BAC) all saw their prices slump.

In August 2011, Kocherlakota was one of three governors who voted against the statement promising to keep the short-term interest rate near zero for two more years.

This year, he had something a say on the new FOMC guidance announced pursuant to the recent FOMC meeting, which attracted much attention.

The reason for his dissent

The Fed stopped offering the numbers-based system of unemployment and inflation thresholds that governed the potential timing of interest rate hikes. Kocherlakota said he would have preferred that the Fed continue to express guidance in terms that leaned more on levels in certain economic indicators, as opposed to escaping this path and carving out a new way of describing future monetary policy.

“Over the past 15 months, the committee’s forward guidance about the Fed funds rate has been highly effective at shaping market expectations,” Kocherlakota said, speaking of the interest rate the Fed offers banks that’s a key benchmark for other rates.

Kocherlakota said the Fed could have done better by amending the existing threshold system by adding to the formula a condition that also considered financial stability.

Though Kocherlakota does believe the March 19 FOMC statement is significant, he dissents from the new guidance for two reasons. “The first reason is that the new guidance weakens the credibility of the committee’s commitment to target 2 percent inflation. The second reason is that the new guidance fosters policy uncertainty and thereby suppresses economic activity,” he said.

To learn how the guidance is weakening the credibility of the FOMC’s commitment, read on to the next part of this series.

Continue to Part 3

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