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Leading Fed Inflation Hawk Now Thinks Central Bank Not Doing Enough

It wasn’t so long ago that Narayana Kocherlakota, the President of the Minneapolis Federal Reserve, was the leader of the coalition arguing for tighter monetary policy, even in the middle of mass unemployment. He claimed that unemployment was structural in nature, and that we risked runaway inflation with ultra-low interest rates.

Just a year or so later, Kocherlakota is complaining that the Federal Reserve isn’t doing enough to boost the economy. It’s a pretty remarkable transition, and totally based on the data.

Continuing problems in the U.S. economy suggest that the Federal Reserve may not be providing enough stimulus, a central bank official said Tuesday.

“The U.S. economy is recovering from the largest adverse shock in 80 years–and a historically unprecedented shock should lead to a historically unprecedented monetary-policy response,” Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said in remarks prepared for delivery before a gathering at the University of Minnesota in Duluth.

Observing that most Fed policy makers expect inflation to be at or under the Fed’s 2% target for some time to come, Mr. Kocherlakota said he believes the central bank has more room to act. “Given how high unemployment is expected to remain over the next few years, these inflation forecasts suggest that monetary policy is, if anything, too tight, not too easy,” the policy maker said.

Again, this is not surprising solely because a leading monetary policymaker is properly describing the factual basis of the economy, but because this is the same policymaker that had the exact opposite opinion just a year ago.

Unfortunately, Kocherlakota doesn’t have a vote right now on the Fed, because of the rotating nature of the regional Fed Presidents on the Federal Open Market Committee. But he does have a powerful voice by nature of his shift in attitude. His main program is that the Fed should communicate that they will keep their stimulative policies until employment hits 5.5%, unless core inflation raised above 2.25%. This is essentially an quarter-point increase in the current de facto inflation ceiling of 2%, but with inflation no factor right now, this would keep monetary policy stimulative for years. And focusing on the goal of a rapid return toward full employment is a radical shift for any monetary policymaker.

Kocherlakota is a testament to the proposition that minds should change when demonstrable reality conflicts with their beliefs. He should be applauded for this.

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David Dayen

David Dayen

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