By Steven K. Beckner
STANFORD (MNI) – Minneapolis Federal Reserve Bank President
Narayana Kocherlakota Tuesday said the Fed has done a good job of
controlling inflation and, in fact, has broken the traditional link
between money supply growth and inflation.
Kocherlakota, a voting member of the Fed’s policymaking Federal
Open Market Committee, noted that inflation has averaged less than 2% in
recent years.
He said public concern about inflation is related more to the
growth of the Fed balance sheet than to the behavior of price indices
as he responded to questions following a speech at Stanford University.
But he said the link between bank reserve and base money growth is
“gone,” because the Fed now has the ability to pay interest on reserves
and thus prevent reserves from being transformed into broad money supply
growth.
In his speech, Kocherlakota stressed the need for a “public
contingency plan” outlining the conditions under which the Fed will
raise or lower interest rates.
Stanford Professor John Taylor of “Taylor Rule” fame challenged
him, saying that such a contingency plan “doesn’t say anything about
what you should do … whether you do $2 trillion or $10 trillion …
It’s completely unaccountable.”
Kocherlakota described Taylor’s comment as “totally fair.” He said
he had been trying to describe contingency planning “qualitatively.”
“To get serious would have to get quantitative,” he added.
Kocherlakota was also challenged sharply by former Secretary of
Treasury and Secretary of State George Schultz, who asked him whether he
thinks there should be “any limits at all” on the amount of lending the
Fed can do, some of which he described as “gifts to the banks.”
He said the Fed’s interventions during the financial crisis were
necessary to prevent a worse outcome.
** Market News International **
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