narayana kocherlakota : monetary policy report to the people of rochester, minnesota speech by mr narayana kocherlakota, president of the federal reserve bank of minneapolis, at the rochester chamber of commerce, rochester, minnesota, 8 april 2014. * * * thanks to david fettig, terry fitzgerald and sam schulhofer - wohl for their assistance with these remarks and the supporting materials. accompanying graphs can be found at the end of the speech. thanks for the introduction, and thank you for the invitation to join you here today. it ’ s a pleasure to be back in rochester. i ’ ll begin my speech with some basics about the federal reserve system and the federal open market committee ( the fomc ). but the bulk of my remarks should be viewed as a quarterly report of sorts. your elected representatives, the congress of the united states, have charged the federal reserve with achieving key macroeconomic goals. my speech will be a report to you, the people of rochester, about how the fomc is doing in terms of achieving those goals. please keep in mind, though, that i will be expressing my own views, and they are not necessarily those of others in the federal reserve system. i look forward to responding to, and learning from, your questions at the conclusion of my remarks. federal reserve system basics let me begin with some basics about the federal reserve system. 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 fom

lots of resources are left unused. but the biggest and most disturbing answer is our fellow americans. there are many productive people in the united states available to work more hours, and our society is deprived of their production. this key point is generally underappreciated. i ’ ve said that the fomc is undershooting its price stability objective and is expected to continue to do so. but we should all keep in mind that this outcome – and especially the forecast for continued undershooting – typically means that the fomc is also underperforming on its other objective of promoting maximum employment. maximum employment i ’ ve argued that the low inflation rate is a signal that the fomc is underperforming with respect to its maximum employment objective. but we don ’ t need to rely on this signal to reach this conclusion. we can readily see this underperformance in numerous key metrics of labor market performance. i ’ ll begin by showing you data on the evolution of the unemployment rate. in march 2007, the unemployment rate was 4. 4 percent. it rose slowly throughout 2007 to reach 5 percent by the end of the year. the national bureau of economic research dates the great recession as having begun in that month. in the wake of the recession, the unemployment rate reached a peak of 10 percent in october 2009. since that date – over four years ago! – the unemployment rate has fallen slowly to 6. 7 percent. this is still unusually high relative to the past quarter century or so. the current unemployment rate is also high relative to most forecasts of its expected long - run level. personally, i expect that, over the long run, the unemployment rate will converge to just over 5 percent. basically, an unemployment rate of 6. 7 percent means that the u. s. labor market is far from healthy. bis central bankers ’ speeches but i would say that this measure – troubling as it is – could well overstate the degree of improvement in the u. s. labor market. to estimate the unemployment rate, the census bureau asks people two questions : are you working? and, if not, have you looked for work in the past four weeks? the unemployment rate measures the ratio of the second number – the recent job searchers – to the sum of the two numbers ( the recent job searchers and the workers ). this means that the unemployment rate can decline for two reasons : because more people are finding work or because