narayana kocherlakota : making monetary policy – public contingency planning using a mandate dashboard speech by mr narayana kocherlakota, president of the federal reserve bank of minneapolis, at the stanford institute for economic policy research ( siepr ), stanford, california, 29 november 2011. * * * i thank doug clement, ron feldman, david fettig, terry fitzgerald and kei - mu yi for their many insightful comments and ideas. john, thanks for the introduction and for the invitation to be here today. it ’ s great to be back on the farm. i have to say that there have been lots of changes. i ’ ve been away only six years, but i hardly recognize the place. this building is, in particular, a fantastic addition to the economics scene here on campus. in my remarks today, i ’ d like to touch on several topics. i ’ ll begin with a quick description of the structure of the federal reserve system and the deliberative process of the federal open market committee – the committee that makes monetary policy for the nation. then i ’ ll describe the fomc ’ s objectives. next, i ’ ll discuss how the fomc can enhance the pursuit of its objectives by formulating a public contingency plan, based on what i term a “ mandate dashboard ”. finally, i ’ ll close with a discussion of considerations for near - term monetary policy actions. after that, i ’ ll be pleased to answer any questions you may have. and before i begin, i should remind you that my comments here today reflect my views alone and not necessarily those of others in the federal reserve system, including my fomc colleagues. some fomc basics let me begin with some basics about the federal reserve system. 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 by area, we ’ re the second largest. our district 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 monetary policy 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, including chairman bernanke, contribute to these deliberations

” brookings papers on economic activity. bis central bankers ’ speeches 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. 3 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. 3 percent means that the u. s. labor market is not healthy. 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 fewer people are looking for work. most of the declines in the unemployment rate since october 2009 have occurred because the fraction of people who are looking for work has fallen. this characterization is borne out if we look at the evolution of the fraction of people over the age of 16 who have a job – what ’ s called the employment - to - population ratio. in march 2007, the employment - to - population ratio was over 63 percent. the employment - topopulation ratio fell sharply during the great recession and bottomed out at just over 58 percent in mid - 2011. the percentage has risen little from this low point and remains lower than at any time between 1986 and 2007. it is true that, even without the great recession, demographic forces would have led to some decline in the employment - to -