By Brai Odion-Esene

WASHINGTON (MNI) – With the Federal Reserve having cut interest
rates to record lows, communication of the central bank’s thinking and
the likely path of future monetary policy “is especially important now,”
Minneapolis Federal Reserve Bank President Narayana Kocherlakota said
Wednesday.

And while Kocherlakota praised the Fed’s drive towards expanding
Americans’ understanding of policy and improving transparency, he again
called for the Fed’s policymaking body, the Federal Open Market
Committee, to publish a public contingency plan, arguing that it would
provide even greater clarity to the American public.

In remarks prepared for the Business Law Institute in Minneapolis,
Kocherlakota steered clear of any comments on current monetary policy or
economic conditions, focusing instead on the Fed’s efforts to improve
public knowledge of what, and will, drive monetary policy.

Kocherlakota will be a voting member of the FOMC in 2014.

He noted that the FOMC is currently targeting a fed funds rate of
between 0 and 25 basis points. “The rate can’t get any lower,”
Kocherlakota said, “But one way to vary monetary stimulus today is to
influence the public’s expectations of how long the fed funds rate will
stay so low-and how fast the fed funds rate will rise when it does start
to rise.”

“Thus, communication, while always important, is especially so
today,” he added.

But although the FOMC has taken great strides to improve its
communication, there is more that can be done, Kocherlakota said.

He went on to talk about the need for a public contingency plan
from the Fed’s steering group, arguing that not only would it inform the
public of the sort of scenarios — “both surprisingly positive and
surprisingly negative” — under consideration by the FOMC, “it would
inform the public about how the Committee plans to react to those
scenarios.”

With regard to measures introduced this year to increase the Fed’s
transparency, Kocherlakota stressed that projections by FOMC
participants of the future path of the fed funds rate — now released
on a quarterly basis — are not forecasts of what policy will be.

Rather, “They are judgments about what appropriate policy should
be,” he said.

In its latest policy statement, the FOMC said it believed current
conditions will likely warrant interest rates remaining at close to zero
until late-2014. Not all Fed officials share this view, however, with
the summary of participants assessments showing 3 see a rate hike as
appropriate this year, while 3 believe the first rate hike should come
in 2013.

But echoing comments by Fed Chairman Ben Bernanke during his April
25 news conference, Kocherlakota cautioned that “the policy assessments
are but one of many inputs into the policy process. In his (Bernanke)
words, the FOMC statement ‘trumps’ whatever information is in the policy
assessments themselves.”

Still, improved transparency has been a boon for the Fed,
Kocherlakota said, noting that the now explicit 2% annual inflation
target helps anchor inflation expectations.

It has also pushed the Fed to become “more disciplined,” he
continued, ensuring that its actions are consistent with its stated
policy objectives.

“When performance matches words, the public will have an even
stronger belief in the central bank, which serves to anchor inflation
expectations more solidly,” Kocherlakota said.

** MNI Washington Bureau: 202-371-2121 **

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