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Is the FOMC achieving its goals? Narayana Kocherlakota weighs in

Is the FOMC achieving its goals? Narayana Kocherlakota weighs in (Part 1 of 8)

Is the FOMC achieving its goals? Narayana Kocherlakota weighs in

Is the FOMC is achieving its goals?

In a speech at the Rochester Chamber of Commerce on April 8, 2014, Narayana Kocherlakota—President of the Federal Reserve Bank of Minneapolis—reported on how the Federal Open Market Committee (or FOMC) is doing in terms of achieving the goals determined by the elected representatives of the Congress of the United States.

The Fed's Dual MandateEnlarge Graph

Kocherlakota stated that the bulk of his remarks should be viewed as a “quarterly report of sorts.”

He began his speech by highlighting some basics about the Federal Reserve System and the FOMC, touching upon the Fed’s history and explaining the importance of two-way communication between the Fed and U.S. citizens.

Kocherlakota then went on to explain what the FOMC is seeking to achieve by varying its level of monetary stimulus. Congress has charged the FOMC with the task of formulating monetary policy to promote price stability and maximum employment. The FOMC has interpreted the first goal, price stability, to mean keeping inflation close to 2%. The FOMC’s job is to vary monetary stimulus over time to meet these mandated objectives.

We can see that changes in the Fed funds rate affects certain Treasury ETFs like the iShares Barclays 1-3 Year Treasury Bond Fund (SHY) and the iShares Barclays 20 Year Treasury Bond Fund (TLT), which track the performance of short-term and long-term U.S. Treasury securities, respectively. ETFs like the SPDR S&P 500 ETF (SPY) and the iShares S&P 100 ETF (OEF), which track broader equity market indices and hold the large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM) in their portfolio, are useful in indicating the course the U.S. economy is taking.

For the remainder of his speech, Kocherlakota reported to his audience on how the FOMC is doing in terms of meeting these goals. He drew his audience to two main conclusions about the FOMC:

  1. The FOMC is undershooting its price stability objective.
  2. The FOMC is also underperforming with respect to its maximum employment objective.

Kocherlakota concluded by agreeing that the FOMC needs to do a better job with respect to attaining its two congressionally mandated objectives.

The next part of this series discusses how Kocherlakota enlightened his audience about the basic structure and function of the United States Federal Reserve system.

The Realist Discussions

  • voltaic

    It was an interesting presentation and rather well explained until he blamed the Great Recession on those with bad credit: “The Great Recession, also called the housing bubble, was a result of Americans with the poorest credit being leant money to purchase houses they couldn’t afford. It impacted the U.S. economy badly.” That’s like blaming WWII on Hawaiians. The gambling big banks, the naked derivatives, the overleveraged consumer given a false sense of security with easy home equity loans and betting that the stock market only goes up are the real causes. Blaming the poor for this economic disaster is near pathetic and just points to the fact that thos einvolved with creating the diaster don’t want to take credit for its destruction.