WASHINGTON — Minneapolis Federal Reserve Bank President Narayana Kocherlakota Monday weighed into the post-FOMC debate about the Fed's actual policy intentions, saying the committee had left a clarity gap and sharpening up the communications about policy intentions could put downward pressure on market rates and provide needed economic stimulus.
In fact, he told reporters, the FOMC "buried the lede" and should repeatedly emphasize one key phrase in its policy statement: "the committee expects a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the recovery strengthens."
"We have to bring that forward and hammer it every time we talk about policy, that that's our guiding principle," Kocherlakota said in a conference call. "Communication is about emphasis as much as what we're doing."
Given that "informational vacuum," he said, "it is not surprising that relatively small changes in FOMC communications can have large effects on the public's beliefs about this key aspect of the Committee's reaction function. And all of our models tell us that these beliefs about longer-term policy actually matter greatly for near-term and medium-term stimulus."
Stressing that he was expressing his own personal views, not those of the Fed, Kocherlakota said he wanted to clarify the "misperception" that the FOMC had taken a hawkish turn, based on the reaction of commentators, because the committee's statement is "not as sharp" as it could be.
That forward guidance is in itself necessary additional stimulus, he said.
As for the market reaction, "I think what we've seen so far is not a cause for concern, but obviously if higher yields were hardened over a longer period of time that would be restrictive to economic conditions, and would suppress demand, thereby suppressing prices and employment in a way I don't think would be conducive to the committee's goals," he said.
However, he downplayed the need for more specifics about the expected pace of asset purchases, in favor of more specifics about policy course.
"All of our model analysis says the actual pace of tapering is not all that important intrinsically," he said, but people are "fixated" on the pace "because we have said so little about something that is important for the economics, which is how we're going to behave when the economy recovers.
"That means any little step, no matter how trivial is generating a lot of reaction."
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