Why Minneapolis Fed President Kocherlakota disagrees with the FOMC

Why Minneapolis Fed President Kocherlakota disagrees with the FOMC (Part 1 of 6)

The FOMC adopts new forward guidance that affects stocks and ETFs

The FOMC’s new forward guidance

The policy statement following the recent Federal Open Market Committee (or FOMC) meeting held on March 18–19 received diverse reactions from policy makers and the investment community.

Federal Funds RateEnlarge Graph

The key takeaways

The key takeaways from the FOMC statement were:

  • The Fed is on track to finish its bond buying program in the coming months as long as the U.S. economy stays on the path to recovery. For now, Fed asset purchases stand at $55 billion a month, down from the $85 billion before the taper started in December 2013.
  • The Fed decided to drop the 6.5% unemployment rate threshold.
  • The Fed expects to see 2.8% to 3% growth this year, down from its previous estimate of 2.8% to 3.2%.
  • The FOMC could consider increasing the benchmark rate “something on the order of around six months” after ending asset purchases.
  • From its previous forward guidance strategy, the Fed is now seen to take a qualitative guidance approach, wherein it might be less specific about economic targets.

In reaction to the FOMC announcement, the bond markets fell, leading to a yield spike. The increase in the Fed funds rate earlier than expected was the primary reason for the fall. The fall impacted popular bond exchange-traded funds (or ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond (JNK), which fell by 0.51% and 0.34% respectively. The Dow Jones industrial average (DJI), which includes companies like Microsoft Corporation (MSFT) and Johnson & Johnson (JNJ), dropped 0.8%.

To find out more about the FOMC and its agenda, see the Market Realist article Janet Yellen to chair her first FOMC meeting this month.

While all other board members of the Fed Reserve voted for the FOMC monetary policy action and the introduction of new forward guidance, Minneapolis Fed president Narayana Kocherlakota voted against the change.

To learn more about the Minneapolis Fed president and his dissent, read on to the next part of this series.

The Realist Discussions

  • http://PeterPalms.com/banking Peter Palms

    The accepted version of history is that the Federal Reserve was created to stabilize our economy. One of the most widely-used textbooks on this subject says: “It sprang from the panic of 1907, with its alarming epidemic of bank failures: the country was fed IT once and for all with the anarchy of unstable private banking.” Even the most naive student must sense a grave contradiction between this cherished view and the System’s actual performance. Since its inception, it has presided over the crashes of 1921 and 1929; the Great Depression of ’29 to ’39; recessions in ’53, ’57, ’69, ’75, and ’81; a stock market “Black Monday” in ’87; and a 1000% inflation which has destroyed 90% of the dollar’s purchasing. 3 power. Let us be more specific on that last point. By 1990, an annual income of $10,000 was required to buy what took only $1,000 in 1914.4 That incredible loss in value was quietly transferred to the federal government in the form of hidden taxation, and the Federal Reserve System was the mechanism by which it was accomplished.

    Actions have consequences. The consequences of wealth confis- cation by the Federal-Reserve mechanism are now upon us. In the current decade, corporate debt is soaring; personal debt is greater than ever; both business and personal bankruptcies are at an all-time high; banks and savings and loan associations are failing in
    1. Quoted by Kolko, Triumph, p. 235.
    2. Paul A. Samuelson, Economics, 8th ed. (New York: McGraw-Hill, 1970), p. 272.
    3. See “Money, Banking, and Biblical Ethics,” by Ronald H. Nash, Durell Journal of Money and Banking, February, 1990.
    4. When one considers that the income tax had just been introduced in 1913 and that such low figures were completely exempt, an income at that time of $1,000 actually was the equivalent of earning $15,400 now, before paying 35% taxes. When the amount now taken by state and local governments is added to the total bite, the figure is close to $20,000.

    larger numbers than ever before; interest on the national debt is consuming more than half of our personal income tax; heavy industry largely has been replaced by overseas competitors; we are facing an international trade deficit for the first time in our history; 75% of downtown Los Angeles and other metropolitan areas is owned by foreigners; and the nation is in economic recession

    The first three Central banks of the United States collapsed The first after 3 years, the second after20 years and the third after 18 years collapsed with 72% inflation and 66% inflation the second and third time.