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Narayana Kocherlakota: Fed should cut rates in lieu of aggressive plan

June 17, 2019

Don’t expect the Federal Reserve to cut interest rates—at least not at this week’s meeting—says Narayana Kocherlakota, the Lionel W. McKenzie Professor of Economics at the University of Rochester. But Kocherlakota, who intimately understands the workings of the Fed after serving six years as president of the Federal Reserve Bank of Minneapolis, thinks lower rates will come at the July meeting.

The Fed—technically the Federal Open Market Committee—meets June 18 and 19 to determine the course of the nation’s monetary policy, which Kocherlakota says essentially boils down to deciding what to do with interest rates. If he were taking part in the meeting, Kocherlakota would argue for a bold plan that commits to drastically cutting rates if unemployment rises to a threatening level. But he doesn’t believe such a plan will materialize, in which case he’d vote to cut rates now.

Whatever decision is made, Kocherlakota says the Fed wants to make sure the move will make for good policy in the long run, without having to be corrected at an upcoming meeting.

Narayana Kocherlakota, the Lionel W. McKenzie Professor of Economics (University of Rochester photo / Brandon Vick)

What are your expectations for the June meeting?

I am not expecting a change in policy, which means the interest rates should remain the same. What I am expecting is a lot of discussion, which takes place in secret, about cutting interest rates by a quarter percentage point at their next meeting in July. Why would they do that? The Federal Reserve is tasked with trying to keep inflation at 2 percent and keep unemployment low. Right now unemployment is about as low as it’s been in the past half-century, which is very good. Inflation remains lower than the Federal Reserve would like—it’s been below 2 percent for most of the last seven years. I think they’re mainly worried about risks. There are signs of risk around the world partly due to big variations in trade policy emerging from the White House. So the Fed is thinking about cutting rates now in order to keep the economy as healthy as possible, if there’s any danger of a recession.

If you were attending the meeting, how would you vote?

I just had an opinion piece published in Bloomberg in which I argued for an aggressive action plan. I’d like to see the Fed promise to cut its target interest rate to 0.25 percent, from its current 2.5 percent, if the unemployment rate rises to 4.1 percent, which is half a percentage point higher than its current level. But I very much doubt the Fed will adopt such a plan, in which case I would be urging a cutting of interest rates as soon as it could be done, either in June or July.

The jobs report released at the beginning of the month has been described as weak. Will that be a factor?

As some people at the Fed have been predicting, even if the economy were completely healthy, jobs growth will slow down at some point. We’ve had very high rates of job creation over the last five years or so, and the number we got this month was a little low compared to previous months—it was about 75,000 if I remember correctly. The latest report shows that employment is simply growing along at a lower but still normal rate, so I don’t think it was all that negative.

The White House has been pressuring the Fed to cut interest rates. Is the Fed immune to that kind of pressure?

Yes, I really think they are. It’s a matter of personalities as much as the system. The Fed views itself as independent of pressure from the White House, and the current chair of the Board of Governors, Jerome Powell, is an independent person. I see no risk of the president’s words having an impact on the Fed’s actions.

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Category: Voices & Opinion

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