Day: September 27, 2013

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, spoke to students in Michigan Tech’s School of Business and Economics about monetary policy and its ability to influence employment and prices in the US economy.

Kocherlakota’s district is the second largest geographically and least populated, he said, stretching from Montana to the Upper Peninsula. As one of twelve districts, he is part of regular meetings of the Federal Reserve open market committee where Ben Bernanke, chair of the committee and Federal Reserve Board, presides.

The representatives of each Federal Reserve District Bank share information about their districts and eventually produce policy. “It’s pretty structured,” he said “And that’s good; it’s not a debate.”

The Federal Reserve is focused on two main macroeconomic variables in their policy deliberations according to Kocherlakota. Price stability–keeping inflation at 2 percent or lower–and reducing unemployment to at least 6.5 percent. They use the federal funds interest rate as the control variable to achieve these two goals.

The unemployment rate is currently at 7.3 percent, and the federal funds interest rate is targeted at 0.25 percent. He does not see that interest rate changing soon.

Questions from the students and others focused on current strategies, and the recession of 2008 seemed to be part of nearly every answer. Kocherlakota stressed that he was answering for himself, and it was not to be taken as official Federal Reserve Bank responses.

When asked about following commodities like oil and gold, Kocherlakota said the Federal Reserve does follow commodity prices.

“Oil can be seen as putting pressure on inflation,” he said. “And it’s hard to predict oil prices. In 2008, oil prices went sky high the first part of the year, but when they collapsed, as they usually do, inflation came down, too.”

The price of gold went up in 2008, due to people’s fear of what to do with their money, he said.

“The Dow Jones was down to 6,000 then,” he said. “When gold dropped in price recently, it meant people were more confident, less fearful than in 2008.”

Kocherlakota also said that the fed can control the federal funds interest rate, but other rates are based on the demands for goods today versus goods in the future. US Treasury securities are still in demand because of their low risk.

How does the global market inflation affect your decision-making, he was asked.

“It’s another factor for us to think about, that could influence our performance, but we are not like New Zealand where it’s all they think about. The US is a relatively closed economy.”

And does he think about the fiscal health of his own district over that of the US?

“We all provide information about our districts, but we make policy for the country,” he said. “Officially, Kansas City, San Francisco and Minneapolis get one vote to represent all three. We vote on national matters.”

As for his district’s economy?

“It’s doing well, but I don’t think the fed can take credit,” Kocherlakota said. “The Upper Peninsula faces challenges that are historical in nature. Montana and Minnesota have unemployment around 5 percent. North Dakota has the oil boom and is around 3 percent. They can’t find people to work in McDonalds! South Dakota is below 4 percent and a bit of a mystery. The labor market could actually be stronger, the economy could be stronger. There are still some 2008 effects.”