Is the FOMC achieving its goals? Narayana Kocherlakota weighs in

Part 3
Is the FOMC achieving its goals? Narayana Kocherlakota weighs in (Part 3 of 8)

Kocherlakota shares an insider’s view of the FOMC and its outlook

An insider’s view

Kocherlakota went on to provide his audience with an insider’s view of the committee. He stated that the committee consists only of the governors, the President of the Federal Reserve Bank of New York, and a rotating group of four other presidents. He confirmed that he’s one of those four presidents this year.

The Fed's Dual MandateEnlarge Graph

In Kocherlakota’s opinion, this FOMC structure, where representatives from different regions of the country have input into FOMC deliberations, mirrors the federalist structure of the government.

At this point, Kocherlakota reminded his audience that the current year marks the 100th anniversary of the opening of the 12 Reserve Banks and the start of the Fed’s work. He talked about a new website that the Fed has created to address people’s queries. You can even visit this site to learn more about the people, places, and events that have shaped Federal Reserve history.

Kocherlakota went on to address his audience on one of the things that he thinks has changed the most over the Federal Reserve’s history: the Fed’s communication with the public. During the past century, the Federal Reserve’s communications to the public about its monetary policy actions have also evolved greatly. The pace of change was especially rapid in the past eight years under Chairman Bernanke’s leadership. During that time, the Federal Reserve specified an explicit target for inflation, began holding regular press conferences, and greatly expanded its use of forward guidance—that is, its communications about the likely future evolution of policy.

He believes in the importance of two-way communication. In order for the Fed to continue to be effective, it needs to communicate its policy decisions transparently to the public. Conversely, it also needs the public’s input on how those policies are affecting them. Events like Fed presidents addressing the public via speeches and meeting with business leaders fosters this two-way communication.

Digressing from the Fed’s history and the importance of two-way communication to go back to the FOMC and the making of monetary policy, Kocherlakota explained that at the FOMC meetings, the Fed decides on the level of monetary stimulus for the economy.

The performances of popular exchange-traded funds (or ETFs) like the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the iShares S&P 100 ETF (OEF), which track large-cap equities of companies like Apple Inc. (AAPL) and Exxon Mobil Corp. (XOM), serve as a good indicator of the course the U.S. economy is taking.

Kocherlakota made three key points regarding monetary stimulus.

  1. When the FOMC changes the level of stimulus, it tends to push inflation and employment in the same direction. Raising (or lowering) the level of stimulus puts upward (or downward) pressure on both inflation and employment.
  2. The FOMC’s actions affect inflation and employment with a lag, usually thought to be about one and a half to two years.
  3. Over the long run, monetary policy is the prime determinant of the overall rate of inflation in the economy, but many factors beyond monetary policy affect the level of employment.

Circling back to the prominent question about what the FOMC seeks to achieve by varying its level of monetary stimulus, Kocherlakota discussed the FOMC’s dual goals (relating to inflation and unemployment) assigned by Congress. He began with inflation.

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