My caption probably overstates the “lift-off” consensus, but there definitely is a movement from the “hawk” to the “dove” perspective on inflation vs. economic growth. Ryan Avent examines the very significant shift of Kocherlakota to a policy square near to the “Evans Rule”.
NARAYANA KOCHERLAKOTA, the president of the Reserve Bank of Minneapolis, has long been a member of the club of more hawkish voices within the Federal Open Market Committee (to which he’ll return as an alternate next year and a voting member in 2014). But where other hawks like Philadelphia Fed president Charles Plosser and Dallas Fed president Richard Fisher advance criticisms of expansionary Fed action that seem rooted in confusion over just how monetary policy works, Mr Kocherlakota understands monetary policy just fine. His concern has instead been that economic potential has fallen more than is appreciated, and that structural unemployment is correspondingly higher. It’s a perfectly coherent view, albeit one that has seemed to be at odds with labour-market data.
And so a frisson of excitement ran through the economics commentariat yesterday when Mr Kocherlakota abruptly signed on to a strategy resembling the one pushed by Chicago Fed president Charles Evans, a supporter of much more aggressive action to help the economy. Speaking in Michigan, Mr Kocherlakota described a plan for ‘liftoff’:
The substance of this liftoff plan is that, as long as longer-term inflation expectations remain stable, the Committee will not raise the fed funds rate unless the medium-term outlook for the inflation rate exceeds a threshold value of 2 1/4 percent or the unemployment rate falls below a threshold value of 5.5 percent. Note that neither of these thresholds should be viewed as triggers—that is, once the relevant cutoffs are crossed, the Committee retains the option of either keeping the fed funds rate extraordinarily low or raising the fed funds rate.
Ryan has much more analysis at Free Exchange.
The Fed’s welcome shift is still not nearly as effective as NGDP-Level-Targetting.