One of the economists who dissented this week says that the conditions aren't right for more stimulus. Is he right?
On Tuesday when the Federal Reserve's monetary policy statement was released, something surprising occurred -- something besides the big news that it decided to tweak its language. Three committee members dissented with that change. We haven't seen this many dissenters since 1992. One of those committee members who disagreed with the majority's decision to state that rates would be left near zero through mid-2013 was Minneapolis Federal Reserve Bank President Narayana Kocherlakota. On Friday, he released a statement explaining his rationale.
His reasoning boils down to the following:
I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November. I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation--easing monetary policy--is the appropriate response to these changes in the economy.
Going forward, my votes on monetary policy will continue to be based on the evolution of the data on PCE inflation and its components, medium-term PCE inflation expectations, and unemployment.
This is actually pretty straightforward. He's saying that we're seeing unemployment fall, so the labor market is moving in the right direction. Additionally, prices are rising at a moderate pace. As a result, the Fed's dual mandate doesn't require additional support. Let's consider each of these claims.