Submitted by Taylor Conant of Economic Policy Journal
Bernanke Gains Clueless Backer In Kocherlakota
The WSJ.com is out with a short profile on Minneapolis Fed president Narayana Kocherlakota, pumping him up as a strong supporter of Ben "QE2'in' the recession away" Bernanke:
Narayana Kocherlakota gets his first crack at voting at Federal Reserve policy meetings later this month, and the wonky former academic said he is likely to support the Fed's controversial $600 billion bond-buying program.
"The bar for dissent from the committee is going to be pretty high for me," Mr. Kocherlakota, 47 years old, said in an extensive interview last week, his first with the national media.
The question of a formal dissent is important given the divisions inside the Fed that emerged as it launched the bond buying in November. Dissent would make it harder for Fed Chairman Ben Bernanke to stick to the program or to expand it if the economy weakens anew.
Unless you're Ben Bernanke, or Hank Paulson. Then you just spook dissenters with end-of-the-world rhetoric if you don't get your way. Or baseball bats.
Caption: Ben Bernanke, up to bat.
Mr. Kocherlakota has come out of his shell slowly since succeeding Gary Stern at the Minneapolis Fed in October 2009. He maintains a strong interest in research, regularly attending Minneapolis Fed seminars conducted jointly with the University of Minnesota, in a research department conference room that the local PhDs call their "inner sanctum."
"He's smart but relatively new to the practical aspects of reading the economy and implementing monetary policy," said J.P. Morgan economist Michael Feroli. "You can almost see his thinking evolve as he acquires more on-the-job learning."
Mr. Kocherlakota was born in Baltimore to two statisticians; reared in Winnipeg, Manitoba, and enrolled as an undergraduate at Princeton University when he was 15 years old. When asked what it was like to go to college at such a young age, the theorist responded that "it's hard to do the counterfactual."
His assertion in August that the nation's unemployment problem might be at least partly immune to Fed action drew fire from Paul Krugman, the New York Times columnist and Princeton economist.
"The Fed does not have a means to transform construction workers into manufacturing workers," Mr. Kocherlakota said. Mr. Krugman assailed the argument as a flawed excuse not to act.
In some places and sectors, he said, that could mean upward wage and inflation pressure, even with high unemployment rates nationally. An unemployment rate somewhere between 6.5% and 8% could be inflationary in this environment, he says. As unemployment starts moving toward that range, he says, the Fed will need to start moving toward raising interest rates.
By the end of the year, he expects unemployment at 9% and inflation at about 1.5%, up from today's 1%. He sees unemployment staying above 8% through 2012, too.
So action, using his calculations, looks a long way off. But he says the links between unemployment, inflation and the next tightening cycle could become a hot topic by year end.