By Steven K. Beckner
(MNI) – Minneapolis Federal Reserve Bank President Narayana
Kocherlakota said Friday that the Federal Open Market Committee’s
extension of its zero federal funds rate stance through at least
mid-2013 was not justified by the economic or inflation data.
Kocherlakota, one of three Federal Reserve Bank presidents who
dissented against the FOMC decision, took the unusual step of posting
both a video and written statement on the Minneapolis Fed’s website
explaining why he dissented just three days after the meeting. The
statement was e-mailed to MNI and other news outlets.
The FOMC reaffirmed its zero to 25 basis point target range for the
federal funds rate Tuesday. And unlike past statements, in which the
Committee said it expected the funds rate to stay “exceptionally low”
and “for an extended period,” the FOMC adopted new, controversial
language:
“The Committee currently anticipates that economic
conditions–including low rates of resource utilization and a subdued
outlook for inflation over the medium run–are likely to warrant
exceptionally low levels for the federal funds rate at least through
mid-2013.”
Joining Kocherlakota in dissent were Dallas Fed President Richard
Fisher and Philadelphia Fed President Charles Plosser. It was the first
time since 1992 that three FOMC members had dissented.
Kocherlakota said he had supported the “extended period” language,
which he took to mean leaving the funds rate near zero for “between
three and six months.”
However, he said he could not go along with the committment to
keeping the funds rate that low until at least the middle of 2013 — a
change which he called “a significant policy step.”
“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,” Kocherlakota
said. “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,” he said.
“In particular, personal consumption expenditure (PCE) inflation
rose notably in the first half of 2011, whether or not one includes food
and energy,” he continued. “At the same time, while unemployment does
remain disturbingly high, it has fallen since November.”
“I can summarize my reasoning as follows,” Kocherlakota went on. “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.”
Kocherlakota said he does “not believe that providing more
accommodation — easing monetary policy — is the appropriate response
to these changes in the economy.”
He said that “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.”
** Market News International **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]