Reuters

(Reuters)

Fed's Kocherlakota: Hard to Add Financial Stability Mandate

Politics Dow Jones Newswires

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Friday he is worried that adding a financial stability mandate to the central bank's official list of goals would muddy its ability to conduct policy effectively.

"Whatever the benefits of a mandate" to promote financial stability, "it is undesirable for that mandate to reduce the level of clarity among policy makers and the public about monetary policy choices and outcomes," Mr. Kocherlakota said in the text of a speech at the Boston Fed.

A stability mandate "is likely to add to public uncertainty about the course of policy and the economy" unless it can cross a high bar of factors that would define it, he said.

The official was discussing a paper written by Boston Fed President Eric Rosengren and some of his staff that argued that while the Fed doesn't officially target financial stability, at times it is clear it has acted as if it has a mandate to do just that.

Mr. Kocherlakota said it would be somewhat worrisome for Fed officials to act as if they have been officially directed to promote financial stability when they haven't.

"The paper suggests that this behavior might, in fact, be desirable," he said. "But I find this suggestion a little troubling. Is it appropriate for a group of unelected officials to make up their own, relatively secret, objective for monetary policy? And how can this opaqueness in the formulation of policy be expected to lead to better policy outcomes?"

Mr. Kocherlakota, who isn't currently a voting member of the interest rate setting Federal Open Market Committee, didn't comment on monetary policy or the economic outlook in his prepared remarks for the conference. Mr. Kocherlakota, who has been a steadfast supporter of aggressive action to support the economy, is due to leave office at the end of the year.

Mr. Kocherlakota said that for a financial stability mandate to work, it would have been be well defined in terms of the time in which it would be expected to be met, it would have to be quantifiable, and it would have to show how officials will react to missing that goal on either the high or low side. He said he is "skeptical" those factors could be met.

Instead, Mr. Kocherlakota said he'd like to see the Fed offer greater clarity in how it pursues its inflation goal, and he said he would like central bankers to say they'd hit this 2% target within a two-year time frame. The Fed has fallen short of this goal for three years, and officials don't expect to achieve it until 2018.

The Fed is charged with promoting maximum job growth, but this is harder to translate into a firm goal, the official said.

"The FOMC has attempted to address the challenging problem of translating the employment mandate into a long-run quantifiable objective. However, it remains ambiguous whether the FOMC views positive and negative deviations from this objective symmetrically," Mr. Kocherlakota said.

Continue Reading Below