Minneapolis Fed President Naryana Kocherlakota Issues Statement Mid-Day Unexpectedly, Supports Continued Easy Policy

Minneapolis Fed President Naryana Kocherlakota issued a statement unexpectedly Monday announcing his views that recent Fed communications have not been clear enough. He fully supports continued easing and argued that the FOMC has not done enough to quell rate hike fears.

Asset Purchases

Kocherlakota reiterated his stance that the Fed keep purchasing assets at the current $85 billion per month rate until the unemployment rate falls or inflation picks up. "The Committee should continue to buy assets at least until the unemployment rate has fallen below 7 percent, as long as the medium-term outlook for the inflation rate remains below 2.5 percent and longer-term inflation expectations remain well anchored."

However, he reiterates the point made by Chairman Bernanke last week that the given levels of unemployment and inflation are thresholds and not limits. In this sense, the levels are not definite and, "depending on economic conditions and assessments of policy effectiveness, it may be appropriate for the Committee to buy additional assets even after the unemployment rate falls below 7 percent."

Fed Funds Rate

Also, Kocherlakota fears that all of the talk of asset purchases and tapering has muted talk of the Fed's traditional source of policy, the Fed Funds Rate. He strongly believes that the Fed needs to be more clear on its rate guidance as it has been with its purchases to restore confidence back into the bond market.

"The Committee should keep its target range for the fed funds rate at its current extraordinarily low level at least until the unemployment rate has fallen below 5.5 percent, as long as the medium-term outlook for the inflation rate remains below 2.5 percent and longer-term inflation expectations remain well anchored. Depending on economic conditions, it may be appropriate for the Committee to keep the fed funds rate extraordinarily low even after the unemployment rate falls below 5.5 percent."

Policy Clarity

Kocherlakota argues that the gap in policy communications comes from the lack of clarity of where rates will be after the Fed begins tapering asset purchases. As of now, the FOMC has only given economic indicator-based guidance for its asset purchase program but has not done so with its Fed Funds Rate guidance. The FOMC has maintained its target-date guidance for the Fed Funds Rate.

"The Committee has not described how it will set its fed funds rate target when the unemployment rate has fallen below 6.5 percent but remains above 5.5 percent—a period of time that I currently expect to last about two years. In contrast, the policy strategy that I described above says specifically that the FOMC will keep the fed funds rate extraordinarily low over that time frame (as long as the inflation conditions are satisfied). This additional clarity about future policy actions will tend to push downward on a variety of market interest rates and provide needed current stimulus to the economy."

And the market needs a monetary boost right now. Fears over tapering have seen rates rise markedly since the middle of May. Mortgage rates have risen about a full percent in just a month, which represents a de facto source of monetary tightening. Kocherlakota thus argues that more clarity on rates could ease fears in the bond markets and send rates back lower, amounting to a de facto monetary stimulus.

"The Committee could better achieve its policy goals if it were to reduce this uncertainty through communicating more information about its likely reactions to additional economic eventualities. I look forward to working with my colleagues to augment our communications in this fashion, and thereby ensuring a faster return to full employment in the context of price stability."

Fed-Speak On the Calendar

Many Fed members are set to speak this week and Kocherlakota's comments show his reluctance to not having a speech scheduled alongside his colleagues. Dallas Fed President Richard Fisher is set to speak this afternoon and again on Wednesday. New York Fed President and permanent FOMC member William Dudley is also set to speak Wednesday and further speeches from Governor Jerome Powell and President Dennis Lockhart are expected on Thursday. On Friday, Governor Jeremy Stein and Presidents Sandra Pinalto and John Williams are scheduled to speak.