October 20, 2016


Has Fed policy slowed the recovery? This former Fed official thinks it might have. (Timothy B. Lee, Oct 18, 2016, Vox)

In 2012, Narayana Kocherlakota did something that's rare for a policymaker of his prominence: He changed his mind. Kocherlakota was the president of the Minneapolis Federal Reserve Bank, which gave him a rotating seat on the powerful Federal Open Market Committee. That's the committee that decides whether -- and to what extent -- the Fed should use its control over the money supply to boost the economy.

When Kocherlakota took the helm of the Minneapolis Fed in 2009, the Minneapolis Star Tribune described him as "openly suspicious of government's ability to bolster economic growth." That view was evident in 2011, when Kocherlakota cast a rare dissenting vote against a stronger Fed effort to boost the economy. He argued that the Fed's dovish policies could create too much inflation.

But the inflation Kocherlakota feared never came, and a year later Kocherlakota's thinking had changed dramatically. In September 2012, he began calling for the Fed to do more to boost the economy. In 2014, he dissented three times from Fed decisions, each time calling for the Fed to be bolder about growth and less worried about inflation.

Kocherlakota's term at the Minneapolis Fed ended earlier this year. He now teaches economics at the University of Rochester and writes a column for Bloomberg. But he has continued to argue that the Fed is too cautious.

If he's right, it could be a really big deal. The current recovery has been the slowest in decades; the economy has fallen trillions of dollars short of its pre-2007 trajectory. Kocherlakota believes inadequate monetary policy is partly to blame for this shortfall.

And his view is becoming increasingly mainstream. Indeed, in a speech last week, Fed Chair Janet Yellen suggested that stronger Fed action might be needed to boost the economy's growth rate. The comments come at a time when the Fed is widely expected to raise interest rates within months. But Yellen's comments -- which echo Kocherlakota's arguments -- suggest that the Fed might want to keep rates low for much longer than that.

The hard part for folks to wrap their heads around is that rates are artificially high, not low.

Posted by at October 20, 2016 2:04 PM