Kocherlakota’s revelation

This is from Bloomberg:

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 the text of remarks prepared for a speech in Ironwood, Michigan, referring the policy-setting Federal Open Market Committee.

…Kocherlakota today 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.

…”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, “the FOMC can provide more current stimulus if people believe that liftoff will be triggered by a lower unemployment rate.”

Kocherlakota said today the central bank should give itself leeway by allowing inflation to deviate from its 2 percent target, saying the FOMC could contemplate raising rates if inflation rises above 2.25 percent. History suggests it’s unlikely inflation will rise above that point as long as the jobless rate remains above 5.5 percent, he said.

“The current economic impact of both forms of accommodation — low interest rates and asset purchases — depends on when the public believes that accommodation will be removed,” Kocherlakota said. Confident the Fed will keep the fed funds rate near zero until achieving 5.5 percent unemployment, “people will spend more today, and that will drive up economic activity,” he said.

This is pretty sensational – it seems like Kocherlakota finally understands. And it is it not only Kocherlakota. In fact it seems like there has been a completely transformation of the thinking at the Federal Reserve. I have no clue what happened at the Fed, but something happened. And it is good…

PS Just so it is 100% clear – I don’t think it is a good idea to target real variables like the unemployment rate and that it would make much more sense to introduce a proper NGDP level target, but at least variations of the Evans rules as suggested by Kocherlakota is much better than the status quo.

Update: See the entire speech here and a summary of Kocherlakota’s “liftoff plan”.

Update 2: Scott Sumner also comments on Kocherlakota.

Leave a comment


  1. Lars
    Tim Duy thinks what´s happened is that the “hawks are being marginalized”. Fischer remains stupidly adamant and Bullard is doing a “political dance”.

    • Yeah I saw Tim’s comments. It might be the case, but I must also say that for some people it is hard to understand monetary policy and particularly how rules and expectations, but once they get it they could change their mind completely – I am seeing that a lot of places these days. It is very positive…I am certainly a lot more positive about the US and global economy today than a week ago.

  2. Martin

     /  September 20, 2012

    Lars, yes it is good, and it is bad.

    5.5% unemployment is probably too low given the minimum wage hike and the unemployment insurance extension, as argued by Scott. This could lead to very high inflation if followed strict to the letter, and therefore it’s also not credible as a target.

    Selgin made a very good point about this, and it should be repeated whenever the target is a real variable.

    • Martin, I agree that 5.5% is a very low target and it shows that a NGDP level target would make a lot more sense.

      However, if they keep an “exit point” at 3% PCE core inflation then if 5.5% is below NAIRU (I am not sure about that…) then they easing would end before you would get to “very high inflation”.

      And again, I agree it is wrong to target a real variable. But compared to the alternative I think the direction the fed is moving in is better than to do nothing…

      • Martin

         /  September 21, 2012

        Definitely, and it seems to beginning to get the right time to step back into stocks. Finally policy seems to be moving somewhere.

  3. Hmmm. This was surprising to me. There do seem to be tectonic plates beginning to shift.

  4. It is exciting news. I think K started moving away from extreme hawk mode several months ago when he gave his presentation regarding the need to target levels rather than rates. It was something more along the lines of your earlier idea of targeting TIPS, but he wanted to use a range of commodity price forecasts, or something like that. There’s a video of it on youtube, and if you watch as he explains why it would be better, you can tell he doesn’t really understand why it’s a better idea than what they were doing, just that it is. At any rate, I think he deserves a lot of credit for at least trying to use brain power to address the situation rather than the rather cliquish hanging on to bad theory like the others are doing.

  5. John S

     /  September 21, 2012

    Please give a shout out to Larry White’s recent End the Fed video–even if you don’t agree with its conclusion, this vid definitely should serve as the template for how to convey a difficult idea (such as NGDP targeting) in less than 5 min: http://learnliberty.org/videos/should-we-end-fed

  6. George Selgin

     /  September 21, 2012

    “if 5.5% is below NAIRU…” That of course is a very BIG “if.” It is Kocherlakota’s suggestion that you can not only confidently know the true value of the natural rate, but also safely treat it as a constant, that makes his statement both irresponsible and retrograde–an abandonment, one again, of lessons hard learned in the 1970s.

    I must repeat my warning to MM’s: if their celebrations of Fed easing are not at least alloyed with very clear warnings about the dangers inherent in employment targeting, which I’m afraid means much more, Lars, than merely observing that “I don’t think it is a good idea to target real variables like the unemployment rate and that it would make much more sense to introduce a proper NGDP level target,” which is really “praising with faint damn,” they might as well call themselves “Market Keynesians.” In other words, Market Monetarists are in danger of sounding like persons who don’t believe we need much worry that the Fed might ever expand too much.

    • George, thanks for your comments. You know how much I appreciate your views AND agree about your worries about endorsing paleo keynesian style policies. However, I must also say that I continue to believe that monetary easing is warranted both in the US and Europe, but not at any price.

      So I continue to think this is a discussion about half full or half empty…BUT I would certainly not hope to turn into a market keynesian, but I am pretty sure that is not going to happen as it is very likely that both the Fed and the ECB will have plenty of opportunities to disappoint us…

  7. Diego Espinosa

     /  September 21, 2012

    The question is whether the Fed can exercise the Kacherlakota rule when the time comes. The UK experience tells us that a CB will tolerate “temporary” inflation well past the point at which it might turn out to be “chronic”. So the question for Kacherlakota is, “if you were on the BOE Monetary Policy Committee, would you have already voted to tighten?” And then the second question, “If our Fed colleagues were on the same, would THEY have voted to tighten?” Even if the answer to the first question is, “yes” (K. would stick to his rule), I doubt the answer to the second one is.

  8. Benjamin Cole

     /  September 23, 2012


    For some reason we live in an era when even microscopic rates of inflation cause some observers to lose their bowels. Can we remember that real growth is more important than 1 or 2 or even 5 percent inflation?

    Add on: The 1970s, we hear that song over and over again.

    Yet since the 1970s, there have been huge changes in the US economy, including trade growing from under 10 percent to about 30 percent of GDP. Private-sector labor unions have been all but vanquished. Retail markets have splintered and splintered again. Transportation and finance deregulated. Top tax rate dropped from 90 percent to 34 percent. Capital is abundant, even glutted. The Internet.

    The large retailers, automakers, unions etc who could make prices stick are gone. There is no demand-pull inflation either. I know of no business or industry that has pricing power.

    Despite the structural ossification of the 1970s, the Fed printed money like crazy. They thought inflation would not respond to monetary policy. Even so, in this perfect storm for inflation that was the 1970s, we did not get hyperinflation, only double-digit inflation, and that only for a few years. Yet this episode of inflation has been built up into a bogeyman larger than the Colossus of Rhodes. Forgottem (except by Scott Sumner, evidently) is that we had a lot of real growth in the 1970s also.

    I do not suggest we target double digit inflation. I do suggest that some, including the very smart and gentlemanly Selgin, may unintentionally be engaging in fear mongering.

    Double-digit inflation is extremely unlikely, and some inflation just ain’t that bad.

    A lot worse is the prolonged unemployment and reduced profits for millions of small businesses, the shrinking of economic opportunities, and the crushing public debts we are building up.

    QE, QE to the moon, monetize debt till the cows come home.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: