Federal Reserve officials have intentionally pursued policies that have kept employment and inflation low over the economic recovery, a member of the central bank said Friday.
Narayana Kocherlakota, the outgoing president of the Federal Reserve Bank of Minneapolis, said at a conference in Philadelphia that the Fed made “choices that were designed to keep both employment and prices needlessly low for years.”
The Fed chose to keep employment low, Kocherlakota said, because officials were following a practice of minimizing movements in the Fed’s short-term interest rate target. That target had been cut to zero during the financial crisis.
The policy that Kocherlakota said the Fed mistakenly followed is known as the “Taylor Rule,” after Stanford professor John Taylor. The rule describes the Fed’s interest rate policy as a function of inflation and gross domestic product.
Kocherlakota suggested that the Fed failed to take the actions necessary during the recession because of its past reliance on the Taylor Rule.
“Put more bluntly, the Taylor Rule required the committee to forgo the timely creation of hundreds of thousands — perhaps millions — of jobs in order to get interest rates back up to normal more rapidly,” he said.
As evidence that the Fed actually intended for unemployment to remain high, Kocherlakota cited the economic projections the Fed’s monetary policy committee published in late 2009. That was the first time Fed members published projections.
At the time, the unemployment rate was nearly 10 percent, and the projections showed that the officials expected it to fall only slowly. Given that those same officials controlled monetary policy, Kocherlakota said, the projections are “best viewed as a description of [Fed officials’] goals for the evolution of inflation and unemployment.”
Kocherlakota advocated that the Fed move away from a policy focused on movements in short-term interest rates and toward a strategy based more on its goals.
In recent years, Kocherlakota has gained a reputation as the most “dovish,” or least concerned about too-high inflation, member of the Fed. He has called for the Fed to pursue easier money, and cautioned against raising rates before clearer signs that inflation will rise. His views often do not align with those of Chairwoman Janet Yellen and the voting majority of the Fed’s monetary policy committee.
The speech was Kocherlakota’s last as a member of the Federal Reserve System. He is retiring and set to be replaced by former bailout czar Neel Kashkari.
