Kocherlakota: FOMC Needs to Define Cost's Role in Tapering

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Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, speaks to the Minnesota Bankers Association in St. Paul, Minnesota, U.S., on Tuesday, Feb. 16, 2010. Kocherlakota predicted the U.S. economic recovery will continue and said the central bank should keep its bank-supervision role to avert a future crisis. Photographer: Craig Lassig/Bloomberg *** Local Caption *** Narayana Kocherlakota

The Federal Open Market Committee's recent statement that tapering will depend on the economic outlook and the "costs and efficacy," could suggest to some The FOMC "is not following a goal-oriented approach to monetary policy," Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday.

"Unfortunately, the recent public conversation about reducing the flow of asset purchases typically places little or no emphasis on these costs and efficacy considerations,"" Kocherlakota told the St. Paul Chamber of Commerce, according to prepared text released by the Fed. "As a result, the dialogue risks creating the perception that the Committee is not following a goal-oriented approach to monetary policy. Such a perception can create doubts and uncertainty about the criteria underlying Committee decisions. We can see the imprint of those doubts and uncertainty in the heightened level of bond market volatility over the past few months. I believe that the Committee could reduce this volatility by greatly enhancing its communication on the role of cost and efficacy considerations in its deliberations about the evolution of asset purchases."

Also, the Fed should detail its projections for the fed funds rate once the jobless level slips below 6.5%, he said. Kocherlakota has stated several times that the Fed should say it plans to keep the fed funds rate "extraordinarily low" until the jobless rate drops below 5.5%, provided the inflation outlook for the coming two years remains below 2.5%.

"Beyond these changes in communication, the Committee could also take concrete policy steps to demonstrate commitment to a goal-oriented approach to policy," he said. "In its most recent statement, the Committee says that it expects the unemployment rate to decline gradually and the inflation rate to be below 2 percent over the medium term. Under a goal-oriented approach, the Committee would respond to this weak outlook by providing more monetary stimulus-for example, by lowering the interest rate being paid to banks on their excess reserves.

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