NEW YORK (Dow Jones)--One member of the troika who opposed the Federal Reserve's recent decision to keep rates at rock bottom levels for two years suggested he won't be repeating his disagreement at coming central bank gatherings.
In a speech, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday "I see no reason to revisit the decisions" made last month, and added "I plan to abide by the August 2011 commitment in thinking about my own future decision."
The reason? With the Fed having made its pledge, "I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future."
Kocherlakota joined with the leaders of the Dallas and Philadelphia Fed earlier this month to formally disagree with the Federal Open Market Committee's conditional commitment to keep very low interest rates in place until the middle of 2013. The official has already explained he thought this was a bad idea given what is happening on the inflation and jobs front.
Since that meeting, pressure has only grown on the Fed to take additional action to support the economy. While Chairman Ben Bernanke didn't offer any clues what lies ahead in a speech last Friday, he did say the September FOMC meeting had been lengthened in order to give central bankers more time to discuss options.
While Kocherlakota appeared to suggest his dissent was unique, he didn't show his hand as to what he wants future policy to look like. He said only that "the case for any additional easing would have to be made on its own merits."
That said, the official spent a considerable amount of his speech--his comments came from remarks prepared for delivery before the National Association of State Treasurers in Bismarck, N.D.--explaining why he did not think the Fed made the right decision on its forward interest rate commitment. He indicated there was even a case to be made for going the other way on policy and tightening it.
"Measures of past and forecasts of future inflationary pressures were higher in August than at the time of the FOMC's last major policy move in November," Kocherlakota explained. Meanwhile, "measures of current labor market slack and expectations of future labor market slack were smaller in August." Based on the rules that help inform monetary policy making, easier policy is unneeded, and what's more, these rules would "recommend that the level of policy accommodation be reduced."
Kocherlakota noted that while its true growth measures have proved anemic, it's the jobs and inflation data central bankers needed to watch. The view he offered on labor market slack may irritate those who believe the central bank is not doing enough to help drop very high levels of unemployment.
The official noted that compared to November 2010, when the Fed launched the bond buying program widely known as QE2, unemployment has dropped. "Much of the decline" is due to discouraged workers simply giving up looking for work, a development Kocherlakota was willing to count as akin to an improvement in the jobs market.
"It still seems appropriate to me to view this change in labor market conditions as representing a decline in labor market slack," the official said. "The recent departures from the labor force imply that there is less downward pressure on wages. Almost by definition, from an economic perspective, this means that there is less slack in the labor market," he said.
Reduced slack increase the odds price pressures can rise. Kocherlakota said when it comes to underlying rates of inflation, "I expect that it will average around 2% per year over 2011 and 2012."
When it comes to growth, Kocherlakota said, "I expect that real GDP growth will average around 2.5% per year" over the current year and next, a modest downgrade relative to his existing views. He added he expects the jobless rate, now at 9.1%, to be "under 8.5% by the end of next year."
--By Michael S. Derby, Dow Jones Newswires; 212-416-2214;
michael.derby@dowjones.com