Narayana R. Kocherlakota, president of the Federal Reserve Bank of Minneapolis is the only senior official arguing publicly that the Fed should do even more. The Fed’s leadership, including incoming chairwoman Janet L. Yellen, decided in December that the economy was strong enough to start scaling back its long-running stimulus campaign. The Fed is expected to announce another $10 billion cut in the Fed’s monthly purchases of Treasury and mortgage-backed securities.
Kocherlakota believes that the Fed has the power and the responsibility to address the problem of the persistent unemployment we are currently experiencing. Kocherlakota’s outspoken advocacy for stronger action is particularly striking because he spent his first three years at the Minneapolis Fed, following his appointment in 2009, loudly arguing that the Fed should do less. Kocherlakota does not oppose reductions in the Fed’s bond purchases, but he wants to compensate by strengthening its plans to suppress short-term interest rates. Kocherlakota asserted that the Fed largely lacked the power to reduce unemployment because the problem was not a lack of job openings, but a lack of workers qualified to fill those openings. “Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers, but the Fed does not have a means to transform construction workers into manufacturing workers.” Kocherlakota had speculated, for example, that some workers might be unable to take jobs in other cities because their mortgage debts exceeded the value of their homes. Research revealed little evidence of this “house lock” phenomenon.
Should the Fed do more? Do they really have the power to fix the problem of persistent unemployment?
Source: The New York Times
2 Comments
Kocherlakota is the most prominent “freshwater” economist I know of to basically issue a mea culpa. However, I’d not seen mention of his use of “structural” stories, and while I at one time thought that way, job losses during the declining phase of the Great Recession were across all industries, and job gains since have also been diverse. You might also see Steve Rattner’s Morning Joe (an online-version here: The Myth of Industrial Rebound). Of course I know Rattner as the Auto Task Force head in 2009 who was central in the successful restructuring of Chrysler and GM, but he’s reasonably careful in his data analysis: before going into I-banking (and become wealthy in the process) he was a NYTimes economics journalist.
I think the Fed has the responsibility to take more actions for a faster economic growth. However, due to the political issues and constraints, I do not think it will be possible for the Fed to do more.
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