WASHINGTON (MNI) – The following statement was issued by
Minneapolis Federal Reserve President Narayana Kocherlakota Friday,
offering reasons for his Federal Open Market Committee dissent. His
office said he will not be commenting further on the subject until his
next speech and media q&a August 30 in Bismarck, North Dakota:

STATEMENT BY NARAYANA KOCHERLAKOTA ON DISSENTING VOTE AT AUGUST 9,
2011, MEETING OF THE FEDERAL OPEN MARKET COMMITTEE

One of my jobs as president of the Federal Reserve Bank of
Minneapolis is to serve on the Federal Open Market Committee. At its
last meeting on August 9, the Committee took what I viewed as a
significant policy step. I dissented from its decision. I believe that
transparency is an essential part of effective policy formation, and so
I’m offering this brief explanation of my decision. These views are not
necessarily those of others on the Federal Open Market Committee,
including presidents Richard Fisher and Charles Plosser.

Entering the meeting, the FOMC was following an unprecedentedly
accommodative monetary policy. There were three elements to this policy.
First, the Federal Reserve owned over $2.5 trillion of long-term
government and government-backed securities. The purchase of the final
$600 billion of these assets was announced in November 2010 and
completed by the end of June 2011. Second, as it had since December
2008, the Committee was maintaining the fed funds rate at between 0 and
25 basis points. Third, as it had since March 2009, the Committee
statement included the forward guidance that it anticipated keeping the
fed funds rate at this low level for “an extended period.” The “extended
period” is generally interpreted as being between three and six months.

The Committee adopted this three-part policy stance in November
2010. I agreed with this decision and supported it publicly at that time
and throughout this year.

In its August 9 meeting, the Committee changed this “extended
period” language to say instead that it “currently anticipates economic
conditions … are likely to warrant extraordinarily low levels of the
federal funds rate through mid-2013.” This statement is designed to let
the public know that the fed funds rate is likely to stay between 0 and
25 basis points over the next two years, not just over the next three to
six months. Hence, the new language is intended to provide more monetary
accommodation than before.

I dissented from this change in language because the evolution of
macroeconomic data did not reflect a need to make monetary policy more
accommodative than in November 2010. In particular, personal consumption
expenditure (PCE) inflation rose notably in the first half of 2011,
whether or not one includes food and energy. At the same time, while
unemployment does remain disturbingly high, it has fallen since
November. I can summarize my reasoning as follows. I believe that in
November, the Committee judiciously chose a level of accommodation that
was well calibrated for the prevailing economic conditions. Since
November, inflation has risen and unemployment has fallen. I do not
believe that providing more accommodation-easing monetary policy-is the
appropriate response to these changes in the economy.

Going forward, my votes on monetary policy will continue to be
based on the evolution of the data on PCE inflation and its components,
medium-term PCE inflation expectations, and unemployment.

–Narayana Kocherlakota, President, Federal Reserve Bank of
Minneapolis

** Market News International Washington Bureau: 202-371-2121 **

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