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Fed's Kocherlakota Warns Fed Guidance Hurts Credibility, Not Dovish Enough

Tyler Durden's picture


Over the past few years we have grown used to the odd dissent among Fed members as hawks complain at the uber-easy policies and the costs outweighing the benefits but it's different this time. Among the most dovish of Fed heads, Narayana Kocherlakota, dissented, warning that the new "guidance" of the Fed (rather than lowering existing and entirely discredited 'thresholds') will hurt Fed credibility, foster undertainty, and lower growth. Perhaps, then, this is moment when the doves cry and in fact the Fed is becoming more hawkish than that investing public really believes is possible.

Statement on Dissenting Vote at March 19, 2014, Meeting of the Federal Open Market Committee
Narayana Kocherlakota - President

I view the March 19 Federal Open Market Committee (FOMC) statement as an unusually significant one. In that statement, the FOMC adopted new forward guidance about the evolution of its target for the federal funds rate. I see that new guidance as being intended to describe the Committee’s decisions for some time to come.

I dissented from the new guidance for two reasons.

  • The first reason is that the new guidance weakens the credibility of the Committee’s commitment to target 2 percent inflation.
  • The second reason is that the new guidance fosters policy uncertainty and thereby suppresses economic activity.

In what follows, I’ll elaborate on these reasons, discuss an alternative form of forward guidance, and conclude by strongly endorsing one aspect of the FOMC’s new forward guidance.

In terms of credibility: the Personal Consumption Expenditure (PCE) inflation rate has drifted downward over the past few years and is currently near 1 percent. The FOMC’s new forward guidance does not communicate purposeful steps being taken to facilitate a more rapid increase of inflation back to the 2 percent target.The absence of this kind of communication weakens the credibility of the Committee’s inflation target, by suggesting that the Committee views persistently sub-2-percent inflation as an acceptable outcome.

In terms of uncertainty: Currently, most labor market metrics imply that the economy is still well short of maximum employment. In its forward guidance, the Committee provides little information about its desired rate of progress toward maximum employment. Indeed, the guidance provides little quantitative information about what would characterize maximum employment. These omissions create uncertainty about the extent to which the Committee is willing to use monetary stimulus to foster faster growth, and this uncertainty is a drag on economic activity.

How could the FOMC have done better? I believe that, over the past 15 months, the Committee’s forward guidance about the fed funds rate has been highly effective at shaping market expectations. That guidance has relied on an unemployment rate threshold of 6.5 percent and an inflation outlook guardrail of 2.5 percent. Given the effectiveness of this quantitative approach, I would have favored adopting a similar approach going forward.

For example, the Committee could have adopted language of the following form: “the Committee anticipates keeping the fed funds rate in its current range at least until the unemployment rate has fallen below 5.5 percent, as long as the one-to-two-year-ahead outlook for PCE inflation remains below 2 1/4 percent, longer-term inflation expectations remain well-anchored, and possible risks to financial stability remain well-contained.” This alternative guidance communicates the Committee’s willingness to use monetary policy tools to push inflation back up to 2 percent. It reduces macroeconomic uncertainty by being clearer about the kinds of labor market and inflation conditions that are likely to be associated with an increase in the fed funds rate. Finally, it deals with the unlikely possibility of risks to financial stability through an explicit escape clause.

There is one key aspect of the Committee’s new forward guidance that I strongly endorse. The guidance provides information about the Committee’s intentions for the behavior of the fed funds rate once employment and inflation are near mandate-consistent levels. Those intentions are appropriate, and communicating them should help stimulate economic activity by reducing uncertainty about the likely path of the fed funds rate once the Committee’s goals are reached.



So, to be clear, Kocherlakota wants to preserve Fed credibility by expansing precisely the actions (and thresholds) that destroyed the credibility of the Fed in the first place, thus confirming forward guidance was a farce at best and a cover-up at worst.


Perhaps the market had it right out of the gate - when the Fed doves are crying then it suggests the Fed's policy is not as uber-dovsh as it has been (and thus more hawkish)...

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Fri, 03/21/2014 - 09:31 | 4576541 fijisailor
fijisailor's picture

Despite "tapering"  the FED expands the monetary base by $104.8 billion in February.


I knew it.  This whole tapering thing is a lie.

Fri, 03/21/2014 - 09:34 | 4576554 Winston Churchill
Winston Churchill's picture

Just as well they get audited.Oh wait......

Fri, 03/21/2014 - 09:37 | 4576561 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The Fed has to appease DC just enough to be reappointed. Obummer is pushing this "recovery" *snicker* so, the Fed will taper to confirm a big lie. When things crash expect the free money gates to flood the system again.

Fri, 03/21/2014 - 09:51 | 4576618 ArkansasAngie
ArkansasAngie's picture

The load is shifting in the tanker truck just as it's entering a curve.  The mountain is getting steeper and the turns sharper.  If you don't slow down, its a tough slog over the railing.

Them Fedury boys aren't stupid.  Their charts are presumably better causin they have the real numbers.  

QE ain't working.

The experiment is a bust.

Fri, 03/21/2014 - 10:01 | 4576655 whotookmyalias
whotookmyalias's picture

Translation: "We feed off uncertainty and our lies are not misleading enough."

Fri, 03/21/2014 - 10:39 | 4576842 SoilMyselfRotten
SoilMyselfRotten's picture

Good cop, bad cop, all for show

Fri, 03/21/2014 - 16:10 | 4578320 daveO
daveO's picture

No, it worked at taking bad loans off of the banks' balance sheets. When that is complete(ever?), they will become more hawkish so the banks can profit from higher spreads.

Fri, 03/21/2014 - 09:37 | 4576562 Occident Mortal
Occident Mortal's picture

Everyone knows the monetary system is a confidence trick by now.


It's just suspended disbelief that's keeping it going. Turns out suspended disbelief is a powerful thing.

Fri, 03/21/2014 - 09:46 | 4576600 tarsubil
tarsubil's picture

As long as Wile E. Coyote doesn't look down, it will be okay.

Fri, 03/21/2014 - 10:01 | 4576658 whotookmyalias
whotookmyalias's picture


Fri, 03/21/2014 - 14:03 | 4577804 TheReplacement
TheReplacement's picture

But that dumbass does always look down eventually.

Fri, 03/21/2014 - 09:53 | 4576627 ArkansasAngie
ArkansasAngie's picture

I wish they knew.


Fri, 03/21/2014 - 16:12 | 4578330 daveO
daveO's picture

It's being propped up by ME oil countries who don't want to meet the same fate as Gadhafi.

Fri, 03/21/2014 - 09:43 | 4576580 Stoploss
Stoploss's picture

Ship of fools..


Fri, 03/21/2014 - 09:38 | 4576567 tarsubil
Fri, 03/21/2014 - 10:34 | 4576813 Al Huxley
Al Huxley's picture

Wow, their assets are really tailing off nicely aren't they?  I guess this goes hand in hand with the 'oops we thought the deficit was 680 billion but its actually a trillion' news.  Wonder how old Yeller's gonna balance the books with her magic taper in light of that.

Fri, 03/21/2014 - 09:39 | 4576569 lordylord
lordylord's picture

The Fed is performing its intended duty to perfection.  Their function is not to stabilize or guide the economy.  Their function is to loot the country of its wealth and to create a nation of debt slaves.  End the Fed now.

Fri, 03/21/2014 - 14:08 | 4577828 TheReplacement
TheReplacement's picture

We could let them keep going.  After all, they are dealing in paper.  We are holding metals like steel, brass, lead, and copper.  Just ask China, possession is 9/10s.  Once the FED has all the paper and demands the goods we simply have a bonfire of the bankers. 

Start talking to the military and police types you know.  Help them understand that when the day comes, they need to be smart enough to see that piles of paper or cotton will not have real value. 

Fri, 03/21/2014 - 10:11 | 4576701 skwid vacuous
skwid vacuous's picture

Even the token Fed goy has to be named Kosher-Lakota, lol! 

Fri, 03/21/2014 - 09:33 | 4576543 _ConanTheLibert...
_ConanTheLibertarian_'s picture

What credibility ??

Fri, 03/21/2014 - 09:33 | 4576549 q99x2
q99x2's picture

Fuck the FED. Shut them down and lock them up.

Fri, 03/21/2014 - 14:09 | 4577836 TheReplacement
TheReplacement's picture

So you want to put them in a cushy prison and make me pay for it?  Nice try but no.  I won't pay for that.  You want reimbursement for ammo, fine.

Fri, 03/21/2014 - 09:34 | 4576553 holgerdanske
holgerdanske's picture

Credibility. What's that??

Fri, 03/21/2014 - 09:43 | 4576583 101 years and c...
101 years and counting's picture

its when you say one thing (economy is growing) and then do another (print money to keep the "dream" alive).

Fri, 03/21/2014 - 09:37 | 4576557 Sudden Debt
Sudden Debt's picture

When I was young, Sesammy strees was also pretty credible to me...

then I got a bit older and suddenly CNBC was credible to me...

than It almost bankrupted me and I decided nothing was credible but myself... and now I do well :)

Fri, 03/21/2014 - 09:42 | 4576559 Dr. Engali
Dr. Engali's picture

Kocherlakota is the new Fisher. A "dissenting" voice offering the illusion of diversity of thought, when in truth they are all on the same page...... Lie your ass off.

Fri, 03/21/2014 - 14:11 | 4577843 TheReplacement
TheReplacement's picture

Got that right.  He's only dissenting as to how they are controlling the economy and how they are communicating those moves.  It's basically a strawman objection.

Fri, 03/21/2014 - 09:36 | 4576560 bubblemania
bubblemania's picture

What an Ass Clown!

Fri, 03/21/2014 - 09:37 | 4576563 The_Ungrateful_Yid
The_Ungrateful_Yid's picture

Fuck you moneychanger

Fri, 03/21/2014 - 09:39 | 4576571 khakuda
khakuda's picture

Guys like this virtually guarantee big bubbles and big crashes.  Then, they take no responsibility for their actions.

Fri, 03/21/2014 - 09:40 | 4576573 I am a Man I am...
I am a Man I am Forty's picture

somebody ask her why it's ok to devalue the currency at 2 to 2.5% per year

Fri, 03/21/2014 - 09:43 | 4576587 Dr. Engali
Dr. Engali's picture

Because the owners of this country told her to.

Fri, 03/21/2014 - 16:19 | 4578353 daveO
daveO's picture

That way, bankers get to steal from the US, who uses about 25% of the world's oil and, also, most of the rest of the world at the same time. You could call it a World Tax on Energy courtesy of the banksters. 

Fri, 03/21/2014 - 09:43 | 4576582 LawsofPhysics
LawsofPhysics's picture

yet another scared paper-pusher who contributes NOTHING of real value to society. 

Think about it guys, if bankers don't have to perform any due diligence when making loans anymore, why are they even getting paid anything at all?  They create money out of thin air risk free now.  why do we ned them at all anymore?

There was a time when banks and bankers could go bankrupt, not anymore.  Fuck em all, hang them high, every last one.

Fri, 03/21/2014 - 12:25 | 4577356 overmedicatedun...
overmedicatedundersexed's picture

que bagdad BOB, while standards of living drop like obuma for a white dick, the fed rabbi's remaining calm and preaching growth and economic recovery. giving a moral people a bad name - this type of sin has led in the past to horrors and sorrow. we never learn, not even the jews of fiat, too bad greenspan did not act on his understanding of gold, but he did what he was told, funny if some trail on finance and crimes of the fed, they will have the same excuse as the nazis : I was following orders.

Fri, 03/21/2014 - 09:59 | 4576651 TrustWho
TrustWho's picture

The Fed should send Ukraine $35 billion and reduce the risk to European banks from Ukrainian default. What a strategy, keep rolling the debt and hope for growth.

Fri, 03/21/2014 - 10:14 | 4576713 LooseLee
LooseLee's picture

The day of reckoning for these charlatans is fast approaching. This Kocherlakota personifies all that is wrong with America (and the world) and he will one day regret that he ever was born. In some perverted way I feel sorry for and pity this is what has become of the human spirit. It is corrupt and will suffocate in its own stench.

Fri, 03/21/2014 - 10:46 | 4576867 elwind45
elwind45's picture

Just makeup a new name for USA and kick old one to curb! Be careful he woories more then the rest and would win if madam chair cant regain her composition?

Fri, 03/21/2014 - 10:27 | 4576788 Bay of Pigs
Bay of Pigs's picture

Where's the Good Cop, Dick Fisher?

It is all a charade and illusion.

Fri, 03/21/2014 - 11:06 | 4576956 elwind45
elwind45's picture

April 2 2014 will usher in a name change and a life change for this once great nation? No longer will we as a people be known as THE USAbut simply C.A. officially corporate America! After the ceremony tonight don't forget to tune into FOX for LAST VOTE be the one who picks the new colors and pennant design for our new CA? LAST VOTE after the SIMPSONs

Fri, 03/21/2014 - 11:16 | 4577017 TrumpXVI
TrumpXVI's picture

"undertainty"....sounds bad.....don't know what that is.....but it sounds bad.

Fri, 03/21/2014 - 11:29 | 4577088 Itchy and Scratchy
Itchy and Scratchy's picture

I got 100 trillion Zimbabwe dollars to throw into the pot if it helps?

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