Nick’s probably saying “OMG Kocherlakota,” but in a good way

Lars Christensen and Michael Darda sent me the following:

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank should hold the main interest rate near zero until unemployment falls below 5.5 percent, marking the first time he has linked policy to a specific economic goal.

“As long as the FOMC is continuing to satisfy its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” Kocherlakota said today in a speech in Ironwood, Michigan, referring to the policy-setting Federal Open Market Committee.

The FOMC announced a new round of quantitative easing last week to spur growth and job creation, while forecasting that the benchmark interest rate will stay at a record low through at least mid-2015. As recently as May, the Minneapolis Fed chief said the central bank may need to begin an exit from record stimulus as early as year-end.

Kocherlakota embraced a proposal by Chicago Fed President Charles Evans to calibrate monetary policy based on specific economic goals. Evans advocates holding to near-zero rates until the jobless rate falls below 7 percent or inflation reaches 3 percent.

“My thinking has been greatly influenced by his,” Kocherlakota said, referring to Evans. “By increasing monetary accommodation, the Committee can better meet its employment mandate while still satisfying its price-stability mandate,” Kocherlakota said to business and community leaders at Gogebic Community College.

Begin Exit

“It’s an appropriate time to start thinking about when to begin the process of reversing the level of accommodation,” Kocherlakota said on May 9. “Six to nine months down the road, we should be thinking about initiating our exit strategy.”

Today, Kocherlakota said that under his proposal the central bank may not raise rates for “four or more years.”

“The FOMC can provide more current stimulus if people believe that liftoff will be triggered by a lower unemployment rate,” he said.

Speaking to reporters after his speech, Kocherlakota said his policy view shifted in recent months because of a variety of factors, including a diminished inflation threat. During the past two to three months, he’s seen “more downward pressure” on prices, he said.

‘Not Structural’

Also, recent research indicates “much of what’s going on with the unemployment rate is not structural,” suggesting that the Fed has more room to bolster growth without stoking inflation, he said.

Kocherlakota said he would have voted in favor of the FOMC’s decision to roll out a new round of stimulus last week, His policy proposal would help “enhance” the effects of the current easing measures in place, he said.


1.  Do miracles happen?  Has the last 10 days been a dream?

2.  Can a hawk suddenly move to the left of Charles Evans?

3.  Did Kocherlakota notice what happened recently to John Roberts’ reputation inside the beltway?

4.  Does Richard Fisher feel like Scalia?

5.  Is it possible that market monetarism played some small role in all this?  Or do we have an inflated sense of our importance? (Don’t answer that, let’s just enjoy the news.)

PS.  Once again; EMPLOYMENT IS A LOUSY TARGET.  But employment plus inflation is a fair proxy for NGDP.  Still, I’d feel much safer with NGDP, and no mention of employment or output gaps.  It’s likely that in 3 or 4 years I’ll be to the right of Kocherlakota, teamed up with George Selgin.

PPS.  If you are confused by the post title, it’s an inside joke.

PPPS.  I hope the next time some reporter questions Bernanke’s “credibility” at a press conference, he cops an attitude and borrows a line from John Wayne/Robert DeNiro/Clint Eastwood/Arnold Schwarzenegger, etc.  He’s got pretty much the entire Fed in his back pocket right now.



24 Responses to “Nick’s probably saying “OMG Kocherlakota,” but in a good way”

  1. Gravatar of foosion foosion
    20. September 2012 at 17:51

    The bad news is this quote from the Bloomberg article:

    The FOMC should give itself leeway by allowing inflation to deviate from its 2 percent target, Kocherlakota said. The committee could contemplate raising rates if inflation rises above 2.25 percent, he said.

    2.25% is not very high.

  2. Gravatar of Nick Rowe Nick Rowe
    20. September 2012 at 18:44

    Well, I am more than a little surprised. And not at all sure what to say! I’m just never sure what strategy space he’s thinking in. And I’m not sure he does either. But I read his speech, and I do think it’s good news. And yes, if he would only replace his “unemployment or inflation” target with an NGDP level path, all the rest of what he said about communications would be rather good.

    This is beginning to make me wonder about the “event study” methodology of Fed announcements. The news is still trickling out on the likelihood and degree to which there has been a change in monetary policy.

  3. Gravatar of Alexander Hudson Alexander Hudson
    20. September 2012 at 18:59

    foosion has a good point. Sure, Kocherlakota has a more aggressive employment threshold than Evans, but his inflation ceiling is much, much lower. Enough so that I don’t think you can characterize him as “to the left” of Evans, whose inflation ceiling is 3 percent.

    Even so, it’s great to hear him so fully on board with an Evans-style rule. Not long ago, it seemed like Evans was the lone voice of reason. Now his position is controlling on the FOMC. Way to go Evans and Bernanke.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. September 2012 at 19:34

    I don’t think the details of K’s speech are all that important. It’s his changed attitude that I find to be key.

  5. Gravatar of marcus nunes marcus nunes
    20. September 2012 at 19:53

    This latest “conversion” just shows how “screwed-up” many at the Fed are (today Bullard was asking for “patience”! and Fischer was being his consistent obnoxious self). For more than two years K has been writing and speaking on the “it´s structural” and outside the purview of MP. At one point he even said that the Fed should raise rates to avoid deflation.
    In his first FOMC meeting as Chairman in 1979 Volcker said:
    “Economic policy has a kind of crisis of credibility. As a result, dramatic action to combat inflation would not receive public support without more of a crisis atmosphere”.
    Bernanke has taken more than 4 years to instill a crisis atmosphere, not at the public at large, but in his own troops! Louzy leader.

  6. Gravatar of Kocherlakota’s revelation « The Market Monetarist Kocherlakota’s revelation « The Market Monetarist
    20. September 2012 at 20:28

    […] 2: Scott Sumner also comments on Kocherlakota. Share this:Email Pin ItLike this:LikeBe the first to like this. 5 Comments by Lars Christensen […]

  7. Gravatar of Neal Neal
    20. September 2012 at 20:38

    Even if you set aside targeting employment+inflation vs employment vs NGDP, consider that the Fed is tying policy to targets. For four years, it’s been helplessly wringing its hands and acting only in bursts of desperation. Simply deciding to make policy contingent on results is a huge positive marginal change.

  8. Gravatar of Morgan Warstler Morgan Warstler
    20. September 2012 at 20:39

    GIANT MISTAKE you are making.

    You should attack and unemployment target with every fiber of your being, or you will lose credibility.

    An unemployment target means we are not forcing the govt. to dance, and immediately puts you int he way of those who want structural reform.


    You refuse to stand on your true bottom line, hiding it from everyone.

    You will take NGDPLT and no make-up, if you don’t explain why, you’ll lose control of your baby.

  9. Gravatar of Daniel Daniel
    20. September 2012 at 21:20

    Has he been advocating this for awhile? Oh well, Martin Wolf just advocated NGDP targeting for the UK.

  10. Gravatar of Saturos Saturos
    20. September 2012 at 21:45

    Neal, in other words, exactly the opposite of what Bullard still advocates. And he was supposed to be the “centrist”!

  11. Gravatar of ssumner ssumner
    21. September 2012 at 04:06

    Nick, Yes, the event study approach only tells you the expected impact of the surprise element of that particular announcement. On the other hand one could argue that the markets are also telling us SOMETHING about the expected level of NGDP growth, and whether it is adequate. Unfortunately they’d tell us much more if we actually had an NGDP futures market.

    Soon after QE2 the Fed started backpeddling. Good to see that QE3 is being followed up by “forward peddling.”

  12. Gravatar of dtoh dtoh
    21. September 2012 at 04:13

    It’s all depends on your view of what causes inflation (excess money or excess demand), but IMHGF you would need sustained NGDP growth over 7% to hit the 3% inflation number. From a practical point of view, this is pretty close to an NGDPLT.

    I think the only thing missing is for the Fed to be more aggressive in describing when they want to get to the target and what they will do to get there (e.g. zero IOR, and “as much as OMP as it takes” rather than “40 billion a month”)

  13. Gravatar of Calm down people. Kocherlakota is still a hawk. « John Barrdear Calm down people. Kocherlakota is still a hawk. « John Barrdear
    21. September 2012 at 05:29

    […] inflation.  Here are Bloomberg, Joe Weisenthal, Neil Irwin, FT Alphaville, Felix Salmon, Tim Duy, Scott Sumner, Aki Ito and Brad […]

  14. Gravatar of Neal Neal
    21. September 2012 at 08:01

    “It’s all depends on your view of what causes inflation (excess money or excess demand)”
    Does it? What’s the difference between excess money and excess demand?

  15. Gravatar of Jason Odegaard Jason Odegaard
    21. September 2012 at 09:30

    Hey, randomly, I ran into Kocherlakota at the airport after the last FOMC meeting. We were both listening to Bernanke’s press conference on our mobiles. I told him that I really appreciated the step forward in the latest policy statement. In my head, I wanted to ask how he would have voted, but with me gushing about how great their policy statement was, I figured it would have been awkward for him to tell me of his opposition to the statement.

    But after Kocherlakota’s latest speech, my concern was probably unfounded. Perhaps he would have said the FOMC should have gone even further!

  16. Gravatar of Josiah Josiah
    21. September 2012 at 10:58

    I wonder what people here think about the big drop in oil prices since the announcement of QE3. Is this a sign that it’s not working?

  17. Gravatar of Saturos Saturos
    21. September 2012 at 11:21

    Binyamin Appelbaum has a point:

  18. Gravatar of Saturos Saturos
    21. September 2012 at 11:31

    Kocherlakota speeches are on YouTube

    HT Justin Wolfers on Twitter

  19. Gravatar of marcus nunes marcus nunes
    21. September 2012 at 13:13

    My earlier comment ended:
    Bernanke has taken more than 4 years to instill a crisis atmosphere, not at the public at large, but in his own troops! Louzy leader.
    Now we learn that he´s being frequently visited by Mr. Robinson:
    “A 58-year-old licensed psychologist, Mr. Robinson specializes in helping companies foster leadership….”

  20. Gravatar of Jason Odegaard Jason Odegaard
    21. September 2012 at 13:47

    The recent “Liftoff Plan” speech by Kocherlakota is on the Mpls Fed’s website, plus two Q&A sessions on his speech:

  21. Gravatar of dtoh dtoh
    21. September 2012 at 14:27

    Let me better phrase it. Some think that a mere increase in the supply of money will cause an increase in inflation. I on the other hand believe you need sufficient demand to cause supply constraints in order to significantly increase inflation.

  22. Gravatar of ssumner ssumner
    21. September 2012 at 16:08

    Josiah, No, oil fell for other reasons.

  23. Gravatar of Saturos Saturos
    21. September 2012 at 22:58

    Neal, dtoh, supply and demand for money determines NGDP. The split of NGDP between inflation and output is determined by where you are on the aggregate supply curve.

    John Barrdear has good comments on Kocherlakota:

  24. Gravatar of dtoh dtoh
    22. September 2012 at 03:36

    I agree with your second point, but I would restate your first point by saying that the supply and demand for financial assets determines NGDP and that when the Fed acts to increase the demand for financial assets it results in an increase in the money supply.

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