Trying to prove that common sense and good judgment must be innate, Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis and graduate of the venerable Princeton University at the age of 19 is out with a speech on monetary policy that makes Argentina’s central bank sound credible. For those of you who don’t follow this stuff regularly (something you can give thanks for on Turkey Day), Kocherlakota is the Fed president who 12 months ago flip-flopped from hawk to uber-dove.
In a speech yesterday, displaying more than a touch of hubris, Kocherlakota, likens today’s Fed (himself included of course) to the widely respected former Fed chief, Paul Volcker. Kocherlakota is making a thinly veiled attempt to justify today’s reckless and failed monetary policy experiment by stamping it with Volcker’s seal of approval. Mr. Volcker would not approve.
Kocherlakota goes on to tell anybody who will listen that the Fed should do “whatever it takes” to lower the unemployment rate, savers, asset bubbles, and inflation be damned. To Wit:
Doing whatever it takes in the next few years will mean something different. It will mean that the FOMC is willing to continue to use the unconventional monetary policy tools that it has employed in the past few years. Indeed, it will mean that the FOMC is willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be. Moreover, doing whatever it takes will mean keeping a historically unusual amount of monetary stimulus in place—and possibly providing more stimulus—even as:
- Interest rates remain near historic lows.
- Economic growth rises above historical averages.
- Per capita employment begins to rise appreciably.
- Asset prices rise to unusually high levels, leading to concerns about “bubbles.”
- The medium-term inflation outlook rises temporarily above 2 percent.
It may not be easy to stick to this path. But I anticipate that the benefits of doing so, in terms of employment gains, will be significant.
If this is the type of monetary policy investors are going to have to navigate in coming years, proper risk management is going to become much more challenging.
Jeremy Jones, CFA
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