Narayana Kocherlakota: Address to North Dakota State University
Opening remarks by Mr Narayana Kocherlakota, President of the Federal Reserve Bank of
Minneapolis in an address to North Dakota State University, Fargo, 15 April 2014.
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Thanks to David Fettig, Terry Fitzgerald and Sam Schulhofer-Wohl for their assistance with these remarks
Thanks for the introduction, Howard, and thank you for the invitation to join you here today.
It's a pleasure to be back in Fargo.
I'll kick things off with some basics about the Federal Reserve System and the Federal Open
Market Committee (the FOMC). But the plan is for us to spend the bulk of our evening on
your questions. One key point before I start: The views I express today are my own and are
not necessarily those of others in the Federal Reserve System, including my colleagues on
the FOMC.
In terms of basics about the Fed: I like to tell people that the Fed is a uniquely American
institution. What do I mean by that? Well, relative to its counterparts around the world, the
U.S. central bank is highly decentralized. The Federal Reserve Bank of Minneapolis is one of
12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C.,
make up the Federal Reserve System. Our Bank represents the ninth of the 12 Federal
Reserve districts and includes Montana, the Dakotas, Minnesota, northwestern Wisconsin
and the Upper Peninsula of Michigan.
Eight times per year, the FOMC meets to set the path of interest rates over the next six to
seven weeks. All 12 presidents of the various regional Federal Reserve Banks - including
me - and the seven governors of the Federal Reserve Board contribute to these
deliberations. However, the Committee itself consists only of the governors, the president of
the Federal Reserve Bank of New York and a rotating group of four other presidents. I'm one
of those four presidents this year. In this way, the structure of the FOMC mirrors the
federalist structure of our government, because representatives from different regions of the
country - the various presidents - have input into FOMC deliberations.
This basic federalist structure has a long history. In fact, this year is the centennial of the
opening of the 12 Reserve Banks and the start of the work undertaken by the Federal
Reserve System. It's been a fascinating hundred years, with many twists and turns along the
way. I'm sure that many of you have questions about that journey. The answers to all of your
questions - and probably more - are on a new website that the Fed has created at
federalreservehistory.org. I encourage you to visit this site to learn more about the people,
places and events that have shaped Federal Reserve history.
I won't say too much more about Fed history - perhaps to the relief of some of you! - but I do
want to address one of the things that I think has changed the most over the Federal
Reserve's history: our communication with the public. A hundred years ago, Congress
created a system that was designed specifically so that the residents of Main Street would
have a voice in monetary policy. Technology has changed a lot since 1914 - I'm told that
they didn't even have smartphones back then - and so the ways that we gather information
from Main Street have changed. But this fact-finding is still an important part of the making of
monetary policy. Indeed, earlier today, I met with Fargo business leaders to gather exactly
this kind of information.
Communication is a two-way street, however. 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. So, as the Federal
Reserve System plans for its second century, I would say that the importance of two-way
communication is a key lesson from the System's first century. 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 into how those policies are affecting them.
Events like the one today, and my meeting with business leaders earlier today, are a key part
of fostering that two-way communication.
With that background in mind, let me turn back to the Federal Open Market Committee and
the making of monetary policy. I mentioned that the FOMC meets eight times per year. At
those meetings, we decide on the level of monetary stimulus for the economy. I won't get into
too many details of what that term "monetary stimulus" means, although I'm sure that I'll be
taking questions about it later.
What is the FOMC seeking to achieve by varying the level of monetary stimulus? Congress
has charged the FOMC with making monetary policy to promote price stability and to
promote maximum employment. The FOMC has interpreted the first goal, price stability, to
mean keeping inflation close to 2 percent.
The FOMC's job is to vary monetary stimulus over time to meet these mandated objectives.
Right now, personal consumption expenditure (PCE) inflation is running well below 2 percent
and is expected to continue to do so for several years. By many measures, employment
remains low and is expected to remain so for several years. Those results are not as good as
they should be - we're undershooting on inflation and underperforming on employment. I
look forward to working with my colleagues to use our monetary policy tools to achieve better
macroeconomic outcomes.
Thanks again, and now let's move on to your questions.