-Plosser, Kocherlakota, Evans Warn of Potential Pitfalls

By Alyce Andres

CHICAGO (MNI) – Three Fed bank presidents Saturday agreed that interest on
excess reserves will be a key tool in unwinding monetary policy accommodation
and nominal GDP targeting could be a tricky and far off endeavor.

The panel included the Federal Reserve Bank Presidents of Chicago, Charles
Evans; Minneapolis, Narayana Kocherlakota; and Philadelphia, Charles Plosser,
speaking to a group of 300 at the Becker Friedman Institute for Economic
Research at the University of Chicago.

Kocherlokota said IOER “will be our main tool when it comes to reversing
policy,” but added that the Fed will not be tinkering with this tool “until we
start worrying about inflationary pressures.

Plosser, said there is “good reason to pay IOER. This is new for us and it
will be an important tool as we start to exit accommodation since we cannot
target the Fed Funds rate due to the size of our balance sheet.

Plosser expressed his concern over nominal GDP targeting by the Fed,
suggesting it implies “some indifference,” and added that it is “hard to
determine what the real level of GDP should be (as it) changes over time.”

Kocherlakota said nominal GDP targeting is challenging in that it is
difficult to “settle on the real path of output,” and it may not necessarily be
“congruent with the dual mandate from Congress.”

Evans said nominal GDP targeting, “is much further down the road” adding
that “the biggest thing we risk with more accommodation, is unwelcomed higher
inflation.

Evans reiterated his long held view that there needs to be more
accommodation but also highlighted that the Federal Open Market Committee made
great progress in its January statement by tightening up its price stability
objective up to 2%.

Evans also reminded the audience that in January “the committee agreed also
that we are committed to the dual mandate but here it is more challenging
because a sustainable rate of inflation can move around on you.” Nonetheless,
the Fed agreed on a balanced approach.

However, Plosser mentioned numerous times his concerns about the
consequences of Fed actions on the future. “I am not convinced that forward
guidance is effective. Either we have not done enough or we do not have the
right model or transmission mechanism.”

“I am concerned about the commitment we are making,” with forward guidance,
Plosser said. “If it is understood, it will not work.” He expressed concerns
that “specific thresholds on employment will be perceived as our target.”

“In the past, (targeting) did not turn out too well. By setting a target,
then you are suggesting you can achieve those targets,” he cautioned. “I am
worried that we are asking too much of policy. If forward guidance is confusing,
it will not work.”

“The hope is that as economy improves and that will keep some of those
excess reserves from flowing out into the economy,” Plosser explained.

–MNI Chicago Bureau; tel: +1 708-784-1849; email: aandres@mni-news.com

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