Minneapolis Fed President Kocherlakota spoke with the Wall Street Journal in comments published today. He said the market reactions to the dot chart and Yellen’s comment about ‘six months’ are great examples of why quantitative QE beats vague commitments:
This is a great example of the challenge that a lack of specificity in your forward guidance confronts you with in communication. If you’re not specific in the statement then market participants are just grasping for scraps of information everywhere, including the dots, as a way to try to formulate what is the committee really thinking.
He said the kind of guidance the Fed is trying to employ requires disciplined communication that’s very hard to live up to.
Kocherlakota also answers questions about why inflation is so low:
A part of it is reflective of ongoing under-utilization of resources in the economy and especially you see that in the labor market. I think that puts downward pressure on wages and that translates into downward pressure on prices. I think there are other factors that I don’t fully understand to be honest, but I think it is a signal of underutilization of resources.
He also said that the outlook hasn’t changed materially and that he doesn’t see the economy stuck in a New Normal “but we should be open to considering that this could be a very persistent aspect of economic life.”
Kocherlakota also had harsh words for the interest rate forecasts.
I’ll be blunt about it. I find that whole exercise to be an extremely distracting one. I’m being asked the following question: Suppose you, Narayana Kocherlakota, were in charge of monetary policy. Now this is a hypothetical. It’s so bizarre that it would not even appear in an economics paper. That’s not really what policy is about. Policy is about how does the committee get together as a collective and formulate how we’re going to react to it.
