Narayana Kocherlakota is the head of the Minneapolis branch of the Federal Reserve, and he’s one of the more intriguing figures in central banking.For a long time he argued that monetary stimulus could do verty little for the economy, since unemployment was largely structural.
Then late last year he came to a shocking ideological U-Turn. He said that unemployment was cylical (meaning reflective of where we were in the economic cycle) and that more could be done.
Tonight he gave a talk that ended with this remarkable paragraph:
Congress has charged the Fed with making monetary policy to achieve two Main Street objectives: keep inflation close to 2 per cent and unemployment low. Monetary policy tools operate with a lag of a year or two. These lags mean that the FOMC’s policy decisions are based on how it expects the economy to perform over the medium term. My own forecast, conditional on the FOMC’s current monetary policy stance, is that inflation will run below the Fed’s target of 2 per cent over the next two years and the unemployment rate will remain elevated. This forecast suggests that, if anything, monetary policy is currently too tight, not too easy.
This is a very deep insight, although one that Milton Friedman understood. Low rates are the symptom of tight monetary policy, because they reflect the fact that inflation is so muted and sub-goal.
Given that the Fed has done all kinds of easing, the normal charge is that the Fed has been too easy. The actual record of the Fed, however, suggests the opposite, as Kocherlakota now says.