PHILADELPHIA (Reuters) - The Federal Reserve purposely sought to keep the U.S. recovery slow after the financial crisis, Narayana Kocherlakota said on Friday in his final public appearance as Minneapolis Fed President.
“We were systematically led to make choices that were designed to keep both employment and prices needlessly low for years,” Kocherlakota said in remarks prepared for delivery at a conference at the Philadelphia Fed. Once the worst of the recession had passed and the economy was growing again, in November 2009, the Fed “was aiming for a slow recovery in both prices and employment.”
Kocherlakota has been a vociferous critic of Fed policy in recent years, calling for easier monetary policy than nearly all of his colleagues. But Friday’s comments mark the first time he has so squarely laid the blame for the tepid recovery at the feet of the central bank.
The problem, Kocherlakota said, was that the Fed relied too heavily on a rule of thumb that put the priority on reducing swings in the policy rate at the cost of faster improvement in employment and inflation. That rule, he said, “required the committee to forgo the timely creation of hundreds of thousands - perhaps millions - of jobs in order to get interest rates back up to normal more rapidly.”
U.S. lawmakers currently considering a bill that enshrines that rule of thumb, known as the Taylor rule for its author Stanford University Professor John Taylor, as a key benchmark, a proposal that Fed Chair Janet Yellen has strongly criticized.
Kocherlakota took Yellen’s argument further on Friday, saying that but for the Fed’s reliance on the Taylor rule framework, millions of jobs could be been created and inflation brought back to the Fed’s 2-percent target.
The Fed should change its policy strategy to put more weight on inflation and employment forecasts, he said. Doing so would create more volatility in the Fed’s policy rate, but would ensure a faster recovery from any future shock.
Kocherlakota won’t attend the Fed’s upcoming policy-setting meeting because it’s too close in time to his planned return to academia on Jan. 1.
Reporting by Jonathan Spicer; writing by Ann Saphir; Editing by Chizu Nomiyama