By Ben Leubsdorf and Jon Hilsenrath
The outlook for U.S. inflation is so weak that Federal Reserve
officials should be thinking about easing monetary policy, and the
central bank certainly should not raise short-term interest rates,
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota
told The Wall Street Journal.
Below are excerpts from the interview, which was conducted
Friday afternoon on the sidelines of the Federal Reserve Bank of
Kansas City's annual economic symposium in Jackson Hole, Wyo. Mr.
Kocherlakota spoke off-camera, and also answered questions for a
video. The transcript has been edited for clarity and length.
WSJ: Do you think the Federal Open Market Committee's next move
should be to tighten policy or to ease policy?
MR. KOCHERLAKOTA: I think it's definitely premature to be
thinking about the removal of accommodation in the form of lifting
off, at least based on my current outlook for inflation. Inflation,
got the numbers this morning: core is running at 1.2% in the PCE
core. I don't see inflation, under my current outlook, getting back
to [the Fed's 2%] target until some latter part of the decade,
2018. Given that long lead time, I don't see it as being
appropriate to begin to talk about the removal of accommodation. If
you do do that, I think you're really sending a message that, or
risk sending the message that, you're not fully committed to
getting to that 2% target.
So then that brings up the second part of your question, about
adding accommodation. Given the inflation outlook I just
described...I'd view it as worth considering, absolutely.
WSJ: There's an awful lot of--maybe cacophony is too strong a
word--but there are an awful lot of views being expressed the last
few days by Fed officials about the policy outlook in the near run,
market volatility, economic data. Is there a risk that you're
confusing the public and the markets about the course of
policy?
MR. KOCHERLAKOTA: There's two different statements there, about
markets and the public. I think that markets--I'm from [the
University of] Chicago, I'm a Chicago Ph.D., so I have a view of
market participants as being pretty sophisticated in the way they
think about the Federal Reserve, and I think a sophisticated
participant will recognize that when FOMC participants like myself
talk about our individual perspectives, that's not describing what
the Committee is going to be doing in two or three weeks. The
person that is speaking for the Committee is the chair when she
gives her press conference, when she testifies before Congress.
Those are the official communications of the Committee.
Then you mentioned the public. I think it's great for the public
to hear where different people are trying to...think through and
struggle with what is a very complicated situation. Many
public-policy issues have this form of being technical, complicated
issues that policy makers have to struggle with, and monetary
policy is just another example. In a democracy like the one we
have, I think it's totally appropriate for the public to be aware
of what principles the policy makers are thinking about and talking
through.
WSJ: Do you risk sending a signal to the markets that you're
indecisive or don't know what to do? And when I say you, I mean the
FOMC.
MR. KOCHERLAKOTA: No, I think that message is one of, what does
the FOMC end up doing at the end. As long as the FOMC itself, as a
committee, collectively makes decisions that are systematic,
reacting to information in an appropriate way, that's what I think
markets will be paying attention to, not the chatter we have on the
sidelines here.
WSJ: You mentioned that, in your inflation outlook, you don't
see us returning to 2% until 2018. What about on the employment
side? You've talked a lot, earlier this year, about the
employment-to-population ratio, and getting that back up will take
years. Do you see us making the same kind of l abor-market progress
this year that we did last year? Last year was obviously very
strong.
MR. KOCHERLAKOTA: Last year was very strong and we're not making
the same kind of progress this year. Now, I say that and it's a
little more confused than my summary just makes it sound, because I
think on the establishment survey, the nonfarm payrolls have
actually looked pretty good. The household employment side has not
looked as strong, and this is even if you look at the 25-to-54
group to try to strip out some of the demographic effects--retiring
baby boomers, etcetera. You just haven't seen the kind of
improvement in that number that we did in 2014. But removing
accommodation is not a step to helping that, and I think being
appropriately patient with respect to inflation will mean we're
being appropriately patient as well with respect to employment. I
think that waiting until inflation gets back to 2% in a sustainable
way will be very helpful on the employment front as well.
WSJ: That's actually the way the Bank of Japan is doing it.
They're saying they're not going to move, they're not going to end
QQE until they get to 2% and are sure they can sustain it.
MR. KOCHERLAKOTA: I want to be clear about what I just said,
then. I am saying that I want to have an outlook for inflation that
will be to 2% in a sustainable way, so one to two years ahead is
what I'm thinking about.
WSJ: You said you think that the Fed should consider easing.
What would be your preferred way of doing that? Would it be new
forward guidance?
MR. KOCHERLAKOTA: It's a conversation I'd be willing to have
among the variety of our tools that we have available. We have more
policy space. I'd like to be briefed by staff and hear what they
have to say about that.
The first thing to do is to make the mindset about, 'OK, we need
to do more to get back to 2%.' That alone is a huge form of
accommodation, in my mind. But then there's the question of what
tools you would use to deliver on that, and as I said, I would need
to be more thoughtful about that than I have been so far.
WSJ: So there's disagreement on the Committee right now about
the timing of liftoff. There seems to be a lot of consensus on the
Committee on two points. One is that rates will be going up over
the next two to three years--I mean, all of the dots are rising,
which must mean that your dot is rising--and that the process of
normalization will be gradual. Is the Committee doing an effective
job right now of communicating this idea, about the gradual nature
of the removal of accommodation? And is there some common ground
there where everyone can agree that there's some stronger message
to be sent?
MR. KOCHERLAKOTA: I'll say a couple things about that. I earlier
pointed to the chair as being the key communicator on the part of
the Committee, and I think the chair has made this point about
gradualism in her communications to Congress, in her testimony in
July.
For my own sake, just speaking from my own perspective, I find
that word, "gradual," as being too vague. It can just mean a lot of
things. I think we just have to be more specific about tying our
choices to what we see in the data and in particular to our
outlooks for key economic variables like inflation and
employment.
Nobody on the Committee thinks that we're going to do a
time-dependent policy over the next two to three years where, if
there were hypothetically liftoff in September, that we would move
once every two meetings or once every four meetings, whatever it
ends up being. I don't think anyone is committed to that. It's a
question of how the data unfolds. And I think a key part of what we
should be doing a better job of, in my view, is
communicating...what is exactly in the data that's making us decide
to lift off now? If we were to lift off, what would influence our
choices down the road?
WSJ: You've got three meetings left before you go back to
academia. Do you think you'll be able to convince your colleagues
that they shouldn't move now, based on the outlook?
MR. KOCHERLAKOTA: It's a committee. I mean, if you haven't
served on committees yet, you will, and you go to a committee and
you try to see how--you do the best you can in those situations,
and see how it unfolds.
WSJ: How would you grade yourself?
MR. KOCHERLAKOTA: I've won some and lost some. I wish I had done
a better job. I think we'd be better positioned policy-wise if I
had done a better job of being persuasive. But I'm sure some of my
colleagues feel the same about their own positions.
Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Jon
Hilsenrath at jon.hilsenrath@wsj.com
(END) Dow Jones Newswires
August 30, 2015 12:49 ET (16:49 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.