One of my jobs as president of the Federal Reserve Bank of Minneapolis is to serve on the Federal Open Market Committee. At its last meeting on August 9, the Committee took what I viewed as a significant policy step. I dissented from its decision. I believe that transparency is an essential part of effective policy formation, and so I’m offering this brief explanation of my decision. These views are not necessarily those of others on the Federal Open Market Committee, including presidents Richard Fisher and Charles Plosser.
Entering the meeting, the FOMC was following an unprecedentedly accommodative monetary policy. There were three elements to this policy. First, the Federal Reserve owned over $2.5 trillion of long-term government and government-backed securities. The purchase of the final $600 billion of these assets was announced in November 2010 and completed by the end of June 2011. Second, as it had since December 2008, the Committee was maintaining the fed funds rate at between 0 and 25 basis points. Third, as it had since March 2009, the Committee statement included the forward guidance that it anticipated keeping the fed funds rate at this low level for “an extended period.” The “extended period” is generally interpreted as being between three and six months.
The Committee adopted this three-part policy stance in November 2010. I agreed with this decision and supported it publicly at that time and throughout this year.
In its August 9 meeting, the Committee changed this “extended period” language to say instead that it “currently anticipates economic conditions … are likely to warrant extraordinarily low levels of the federal funds rate through mid-2013.” This statement is designed to let the public know that the fed funds rate is likely to stay between 0 and 25 basis points over the next two years, not just over the next three to six months. Hence, the new language is intended to provide more monetary accommodation than before.
I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November.
I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation—easing monetary policy—is the appropriate response to these changes in the economy.
Going forward, my votes on monetary policy will continue to be based on the evolution of the data on PCE inflation and its components, medium-term PCE inflation expectations, and unemployment.
—Narayana Kocherlakota, President, Federal Reserve Bank of Minneapolis
1 I thank Ron Feldman, David Fettig, Terry Fitzgerald, Jenni Schoppers, and Kei-Mu Yi for their help in preparing these remarks.
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