Tim Gruber for The New York Times Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis.Two new voters are likely to define the extremes of the debate as the committee charts the Fed’s continuing effort to revive the economy.
One is Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, perhaps the last official who wants the Fed to expand its efforts to reduce unemployment. Meanwhile, Richard Fisher, president of the Federal Reserve Bank of Dallas, is pressing for a faster retreat.
Mr. Kocherlakota and Mr. Fisher sat for separate interviews with The New York Times to talk about monetary policy and the economy this month before the media blackout that precedes each Fed meeting.
A transcript of Mr. Kocherlakota’s comments, edited for clarity, follows. Mr. Fisher’s interview is in a separate post.
Do you think the Fed made a mistake in December when it announced a $10 billion reduction in its monthly purchases of Treasuries and mortgage-backed securities?
My view of what happened in December is that the committee rotated from one set of tools to another, from asset purchases – reducing the flow by $10 billion per meeting unless there is a material change to the outlook – and on the other hand a strengthening of the qualitative forward guidance. On net, my assessment was that left the level of accommodation unchanged. I think that’s consistent with what the chairman said in the press conference and the limited market reaction to the statement.
I felt at the time and I continue to feel that that level of accommodation is unduly low given the outlook for prices and employment. But we have a lot of tools. The observation that we don’t have enough accommodation doesn’t necessarily have anything to do with asset purchases. It does mean that we should be thinking about other things to do.
You have called for the Fed to further strengthen its forward guidance.
There’s certainly a need for more clarity about what’s going to happen when the unemployment rate falls below 6.5 percent. In September 2012 I advocated forward guidance [setting an unemployment rate threshold of 5.5 percent so long as inflation remained below 2.25 percent], and I’m still in favor of that. It hasn’t received a lot of, as much support as I would like from my colleagues.
Is the unemployment rate still the best measuring stick for the Fed to use? It is falling in large part because people are leaving the labor force.
I think internally as an organization we should certainly be looking at lots of different measures. People are very aware of the idea that there’s a broader problem – that friends would like to work more hours – but the way we’ve communicated as an organization, and talked to Congress over the years, has always been through that one metric.
And also, we’ve always tied the inflation rate to this one metric. I still feel that the unemployment rate, I feel more confidence about where that’s going to be, somewhere between 5 and 6 percent, when inflation is 2 percent. That’s pretty good as an estimate. You ask me what is the long-run employment-to-population ratio consistent with 2 percent inflation? The uncertainty is getting much larger. And the problem with unemployment as a metric is really not so important right now. Even if we were a single-mandate bank [focused solely on inflation] it would be clear that we should do more.
You’ve given a speech several times this fall arguing that this is a “time of testing” for the Fed. That phrase is a reference to former Fed Chairman Paul Volcker’s call to arms in the early 1980s. Then the issue was inflation. Now you say it’s unemployment. Yet none of your colleagues at the Fed seem to share your sense of urgency. Why not?
“As long as the outlook for inflation remains low, that means there is more we can do and more that we should be doing.”
As this goes on, there’s a temptation to think of this problem as being beyond what we as monetary policy makers can address. And the reason I feel strongly that there is something we can do about this, is the behavior of inflation. The fact that inflation has remained as low as it has tells us that there is more we can do. One thing I did not address in that speech is how much more we can do. I’ll be frank. I don’t know the answer. But as long as the outlook for inflation remains low, that means there is more we can do and more that we should be doing. And when we don’t do more, given how low inflation is, that pushes downward on everyone’s expectations of how fast the economy is going to be growing.
Do you think your current position reflects the zeal sometimes shown by the converted?
It’s not a religious issue. It’s simply a question of meeting our goals. For me it’s all about, we’ve been given these goals, what do we have to do to get to these goals?
Is your advocacy also, in effect, a critique of the Fed’s actions to date?
I think that’s going to be a question that people will be struggling with. I meant it more as, what should we do moving forward? We shouldn’t let the persistence of the problem lead us to the conclusion that we shouldn’t do more. The last four years have been challenging for me; it’s been a learning process in terms of what’s available in terms of tools and in terms of what should be done. Speaking for myself, maybe others could have done better, but there’s been an evolution in my own thinking.
Some of your colleagues say that the cost of the Fed’s campaign is rising. Specifically, they are concerned that the Fed is destabilizing financial markets. Do you disagree?
I do not see those risks as material for our considerations about why the level of accommodation is where it is.
Really? That wasn’t a factor in the December decision to taper?
I’m just reading the statement. And the statement does not say something material about the reason we are not providing more accommodation being financial stability concerns. And I’ll say that we’ve spent a lot more time and energy in the Federal Reserve system than we did, monitoring the financial stability side. At this stage I don’t think those risks are sufficiently material. As we get closer to full employment and target inflation, the downside risks start to matter more because you’re doing so well on the modal outlook. That’s something we have to take into account when we get closer to normal times.
You referenced the evolution of your views. You were a critic of the Fed’s stimulus campaign for several years after you became president of the Minneapolis Fed in 2009. Then in September 2012 you announced that you had changed your mind. Why?
“It became clearer that my outlook for accelerating inflation was just not consistent with what’s going on in the world. “
On the micro side, my concern was that there were significant impediments to employment that monetary policy could not address. I still have those concerns. But what gave rise to the shifting of the weight I put on those concerns was that there’s just been a ton of work done on the impediments to unemployment growth, nicely summarized in Ed Lazear’s Jackson Hole speech. And at the macro level, coming out of 2011, I had been forecasting high inflation and that was failing to materialize, and I had to come back and think to myself, “What’s special about me that I would think that?” And it became clearer that my outlook for accelerating inflation was just not consistent with what’s going on in the world. So I started putting more weight on the low-demand forces in retarding unemployment.
Many observers were surprised that an economist would abandon a theory simply because it didn’t fit the facts. How did you reach a point where the theory seemed impossible to defend?
It’s a little embarrassing to say this, but you make a speech in August of 2010 and it inspires a whole quantity of work where people say, “This is what Kocherlakota says and we will now show in this paper that Kocherlakota was wrong.” There’s a number of ways that people can react to that, and I reacted in the only way that a sensible person can, which is to update.
It seemed I was wrong enough to make that judgment. I was not trying to find the best way to save my intellectual pedigree. I was trying to do the best job possible.
You once told an interviewer that you like change more than most people. Do you think that played a role in your willingness to change your mind?
Certainly over the course of my academic career I worked in a number of different areas. I’ve worked with Neil Wallace, a premier monetary theorist, but also Luigi Pistaferri, a top empirical labor person. I’ve enjoyed that and I got a lot out of that. I’m not unique in that. But I’ve enjoyed working in a range of subject areas.
Even the act of taking this position was probably a change that — I have embraced it, I enjoy it immensely — a lot of people might not feel the same about that.
You’ve also said that a few other economists were influential in your shift, including Chairman Bernanke; Charles Evans, the president of the Federal Reserve Bank of Chicago; and Ivan Werning, a professor of economics at M.I.T.
My thinking was shaped by a number of people. I’ve talked to Chairman Bernanke about a number of elements about monetary policy, and he’s been an influence on my thinking more generally. I liked the way President Evans formulated a very concrete way to deal with the problem [by calling for the Fed to tie policy to a threshold unemployment rate]. And Werning formulated the issue as being not about generating high inflation, but about formulating expectations of better times to come. Having the recovery’s back, so to speak.
In reading your speeches, I’m struck that you haven’t really found a new explanation for the persistence of high unemployment. You’re basically focusing on inflation instead.
The inflation side is really critical in this – it’s the lack of tension in the mandates that gives you the safety to draw the policy conclusions that I’ve drawn.
From a policy point of view I don’t think those questions [about the labor market] are that material because the outlook for inflation remains low. If the outlook was different, rising above 2 percent, then the discussion for the labor market becomes critical.
Why haven’t we seen even slower inflation?
I think the answer is, anchoring has proven stronger than we thought it was, but that almost just describes the phenomenon in different words.
Inflation now is about what you’d think, this is all very loose, but it’s about right right now, given the amount of slack in the labor markets.
Why inflation was as high as it was given how high unemployment was, I think you just have to say that inflation was better anchored. But I do think that some of these acceleration models have not worked well in this time frame.
You referenced your jump from academic life to the Fed in 2009. Why did you decide to become a policy maker?
2008 was really the answer to that. In the fall of 2008 as the events were unfolding I was just struck by the fact that things were happening that I didn’t really understand, and it seemed to me as well that these were events that were challenging for policy makers. But given my years of study, I didn’t know the answers, but my way of asking questions could be of help. I wanted to help and I felt that I could be of help.
Have you in fact made a difference?
Others can probably do a better job in assessing that. I’ve enjoyed interacting with my colleagues tremendously. I hope I’m helpful to them. I try to be helpful. I find the work as rewarding as can be. I enjoy going to the meetings, I enjoy trying to explain the thinking of the committee. One of the things I didn’t appreciate as fully before I took the job is the hunger to understand economics that’s out there among people.
This is your second turn as a voting member of the F.O.M.C. Last time, in 2011, you dissented twice. Under what circumstances would you once again register a dissent?
I have a high bar for dissent. The issue for me is what actions and communications can I undertake to encourage or facilitate the committee making better decisions. If that involves my dissenting, then I’ll do it. If it doesn’t, then I won’t.