Minneapolis Fed's Kocherlakota Opposes Policy Rule to Decide U.S. Monetary Policy

        By Ben Leubsdorf
        BOSTON--The Federal Reserve should have discretion in setting monetary policy and shouldn't follow a formal policy rule, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Sunday.
        In the U.S., "discretion is better than any rule," Mr. Kocherlakota said in slides prepared for a speech to the Korea-America Economic Association in Boston during the annual meeting of the American Economic Association.
        A policy rule, such as the Taylor rule, is a mathematical equation that calculates the appropriate level for interest rates.
        Mr. Kocherlakota said such rules can be useful when a central bank on its own would allow too much inflation. But, he said, there's "little evidence to support the existence of" a pro-inflation bias at the U.S. central bank.
        House Republicans last year introduced legislation that would have, among other things, required the Fed to adopt a formal Taylor-style rule.
        Rep. Jeb Hensarling (R., Texas), chairman of the House Financial Services Committee, said a "clear, predictable rule" would decide policy "free from political micromanagement."
        The proposal faced strong opposition from Democrats and Fed leaders. "It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule," Chairwoman Janet Yellen told lawmakers last summer.
        The Fed has kept its benchmark short-term interest rate pinned near zero since December 2008 to support the economy, and most officials expect to begin raising rates this year. Under a Taylor-style rule, rates would already have started to rise.
        Federal Reserve Bank of Philadelphia President Charles Plosser, for one, has argued for a rules-based approach to policy.
        (END) Dow Jones Newswires

        January 04, 2015 17:00 ET (22:00 GMT)

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