CHICAGO Oct 9 Narayana Kocherlakota surprised
economists around the world last month when he called on the
U.S. central bank to hold interest rates near zero, possibly for
several years to come.
One of the newest members of the Federal Reserve's top table
had been seen by many in financial markets as one of its more
Only six months earlier, the head of the Minneapolis Fed had
been calling for a tightening of monetary policy by the end of
So it was considered an unusually swift about-face when
Kocherlakota proposed keeping the Fed's benchmark rate near zero
until unemployment is brought way below its current level.
For those who know him well, it was no surprise.
"Narayana was a very independent student. That was something
I saw at a very young age," said Lars Peter Hansen, a professor
at the University of Chicago, where Kocherlakota completed his
dissertation at age 23, having entered Princeton University just
before his 16th birthday.
"I've never really seen him as a person who is rigid."
Kocherlakota was unusually eclectic in his research and he
jumped from one discipline to another with ease, Hansen said.
Born in Baltimore, Kocherlakota spent most of his childhood
in Winnipeg, Canada, where his parents taught statistics at the
University of Manitoba. His father was an immigrant from India
and his mother hailed from a Pittsburgh suburb.
Kocherlakota now lives with his wife, also an economist, and
two Australian shepherd dogs in the Minneapolis suburb of Golden
Valley, where he watches "a totally embarrassing amount of
sports on TV," as he told an employee newsletter after taking
the top job at the Minneapolis Fed in 2009.
As Wall Street Fed-watchers reassessed him after his
headline-grabbing speech last month, Kocherlakota said he had
been persuaded by fellow economists that lower interest rates
could indeed boost employment, despite his previous skepticism.
Work by Edward Lazear, a professor at Stanford Graduate
School of Business, and a speech by Fed Chairman Ben Bernanke at
this year's Jackson Hole conference convinced him that the U.S.
labor market had not undergone such major, structural changes
that monetary policy would not help reduce joblessness, he said.
He was also struck by how inflation had ticked down more
than he had expected.
Kocherlakota was keen to downplay talk of a sudden
conversion to a new view on the economy. "I wouldn't say I woke
up one morning and thought it; it was more a cumulative
process," he told reporters.
THE VIEW FROM THE BUS
Colleagues put it simply: he cares about on-the-ground data,
and he knows how to listen.
That much was clear in August when Kocherlakota, who turns
49 on Friday, donned a pair of jeans and took his board's nine
directors on a tour of the booming oil fields of North Dakota.
In a 14-hour, 300-mile bus trek, they visited a fracking
rig, a pipeline, a workers' camp, and a natural gas plant. They
heard locals speak of life in the heart of the U.S. energy boom.
"His style is to let everybody else do the talking and he
listens intently," said Lawrence Simkins, one of the board
members and president of Montana-based Washington Cos, a
privately owned transportation and equipment firm.
As the bus maneuvered truck-clogged roads, Kocherlakota got
into a discussion with another director about the mental health
toll on workers separated for months on end from their families.
Despite his reputation as an inflation hawk, Kocherlakota's
push for the Fed to do more to stimulate the economy was not a
bolt from the blue. He praised its first round of bond buying,
which began in 2008, and backed its second round in 2010.
Those programs took place against the backdrop of a U.S.
economy in crisis or still limping its way back to recovery.
Last year Kocherlakota opposed further Fed easing because
the economy, in his view, was mending.
At the same time, he liked the thinking behind a proposal
from Chicago Fed President Charles Evans, one of the Fed's most
dovishly growth-focused policymakers, to promise to keep
interest rates low until unemployment fell below 7 percent, as
long as inflation did not threaten to breach 3 percent.
Tying policy to economic milestones, Evans argued, boosts
"I thought he framed things pretty nicely," Kocherlakota
said last October. "But actually getting into the quantities,
that's something I'd have to think about more, and also discuss
with my colleagues more."
Less than two months later, he had his own outline: The Fed
should spell out how it would respond to a rise or decline in
unemployment, and to changes in the inflation outlook.
Kocherlakota and Evans sit next to one another at the
27-foot-long elliptical mahogany table around which Fed
officials gather every six weeks in Washington to decide
They had made an unlikely couple, given their long
contrasting views on the role of interest rates in stirring jobs
That changed at the Fed's meeting last month. As fellow
policymakers agreed to a third and this time open-ended round of
bond-buying to spur the U.S economy, Kocherlakota said inflation
running below his forecast left room for the Fed to keep rates
low for years.
For a week, he kept his plan under wraps before announcing
it to an audience of roughly 80 people at a community college in
Western Michigan, known locally for training ski-lift operators.
He said the Fed should not even start talking about
tightening monetary policy until the jobless rate dropped to 5.5
percent - a big drop from just under 8 percent in September --
or until the medium-term outlook for inflation topped 2.25
The plan drew immediate criticism.
If the Fed adopted it, "inflation credibility would not be
eroded. It would be exploded," said Eric Green of TD Securities,
a former senior economist at the New York Fed. "His views were
quite different six months ago and will no doubt be very
different again" when he rotates into a voting spot on the Fed's
policy-setting panel in 2014.
But Kocherlakota's former professor Hansen said the plan is
not a radical shift, noting it allows very little deviance from
the Fed's 2-percent inflation goal.
So far, Kocherlakota has won little public backing from Fed
Hawkish policymakers worry that more Fed easing will not
help the economy and could fuel inflation expectations.
San Francisco Fed President John Williams, a centrist, said
the plan risks overheating the economy.
By contrast, Chicago's dovish Evans fears it could cause the
Fed to tighten too soon because it only allows "a very modest
increase in inflation" over its 2-percent target.
Nonetheless, the relatively new idea of tying Fed policy to
specific economic turning points is gaining traction.
Fed policymakers left out any numerical thresholds for
joblessness and inflation when they began their new round of
asset purchases last month. But most still think doing so would
be useful in providing more clarity about their policy
intentions, minutes of their most recent meeting show.
Those who know Kocherlakota caution against discounting his
persuasive powers, which helped him get his job in the first
place, according to Mary Brainerd, chief executive of
health-insurance firm HealthPartners and Minneapolis Fed Board
"Because he communicates clearly and thoughtfully, he's very
compelling," she said.