Interview with Narayana Kocherlakota
President of the Federal Reserve Bank of Minneapolis,
Interview conducted by James E. Fogerty
Federal Reserve Bank of Minneapolis
March 26, 2013
Today is March 26, 2013. I am James E. Fogerty, and today I am interviewing Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis. The interview is taking place at the Bank’s headquarters in Minneapolis.
JEF: Let’s start out by talking a little bit about where you were born and grew up and went to school, that sort of thing.
NK: I was born in Baltimore, Maryland. I lived there, I think, for about 11 months, and then my parents whisked me off to Canada. I lived there, in London, Ontario, for probably about two years, and then went with my parents to Winnipeg. Most of my childhood, the formative years I would say, were spent in Winnipeg.
JEF: Out on the Canadian plains, a little bit.
NK: Right. Well, Winnipeg has a lot of similarities with Minneapolis. We certainly used to come down here all the time for shopping trips and that kind of thing, so we were familiar with Minneapolis. It seemed very hot to us; that was our main complaint with Minneapolis. It was too sticky and hot.
I grew up in Winnipeg, went to school there, at public schools, and then I went to Princeton for my undergraduate degree, and then to the University of Chicago for my graduate work.
JEF: Talk a little, just briefly, about growing up … I mean, growing up in Canada must have been interesting, particularly in a city like Winnipeg, which is out there on the plains—it’s far away from the big Canadian population centers.
NK: Well, actually, in Winnipeg we thought of ourselves as a big Canadian population center. We were, at the time, the fourth-largest city in Canada, behind Montreal, Toronto, and Vancouver, although I think the ranking has changed in the interim. You know, I think that growing up in Canada was useful for me. You learn a tremendous amount about the United States, but you learn about it a little bit from a distance, and I was certainly struck by the fact of how much we emphasized American history in our curriculum while I was growing up, in school. But at the same time, it’s at a little bit of a distance, so I think that you have a real appreciation for the U.S. I got to compare it, moving back here, after having spent time in Canada, and I was struck with a lot of the positives. But I think it’s also a positive to have learned about the U.S. from being outside of it. So, I think that’s been a positive experience for me.
JEF: That is interesting, because now you’re president of a Federal Reserve Bank in a region that does a lot of business with Canada.
NK: Yes, but you know, I have to say that my Canadian links have deteriorated greatly, so I don’t know that they mean much anymore. And Canada has changed tremendously. I moved away, moved back to the States in 1979, so that’s a long time ago. It was a useful experience to grow up there, but it’s a long time ago now. That’s all you can say.
JEF: Talk a little, if you would, about your parents, too, because, as I’ve understood, their own careers have influenced, in some way, where you went.
NK: It’s got to be true. I mean, both my parents were academics. They were professors of statistics at the University of Manitoba. They both got their degrees at Johns Hopkins. That’s why I was born in Baltimore, because they were both graduate students there at the time. They were scholars, and certainly their example, I am sure, led me to be a scholar. My dad was from India, and my mom was from the United States, so I got exposed to both cultures, I would say, while growing up, in a lot of different ways. All American school kids were reading about Lincoln, and I was reading about Lincoln, as an example of the kind of person you would want to be. But at the same time, I was reading about Mohandas Gandhi as the kind of person you want to be. So I think this was a very rich kind of childhood as a result of having the exposure to both backgrounds. At the same time, the third thing is that you’re exposed to, on the outside, this flow of information about Canada. So it was a very multicultural kind of upbringing, I would say.
JEF: And an interesting preparation, because as the world has gone global, that’s kind of an interesting background to have come from.
NK: You know, it’s true that at the time it seemed more unusual as a background than it does now. Today the kind of exposures, the multicultural exposures, that I have are more natural in the current, more global kind of environment than they were in the 1970s.
JEF: Talk about what it must have been like … I was struck by the fact that you were admitted to Princeton at an age when most people wouldn’t be admitted to Princeton. What was that like?
NK: I was asked about this by a reporter at one point. I said that it is very hard to do the counterfactual, because it just seemed like something that was pretty natural. I entered school—by today’s standards I guess it’s a little early—so I entered school; I entered grade one, as we would say in Canada—first grade, I guess you would say here—when I was five. I turned six almost immediately thereafter, in October. But nowadays you would start a year later if you were in the American system. And then I skipped a couple of grades along the way, and then you’re sort of done. So what do you do next? Go on to the university. I don’t want to make too much of it [chuckles], but it was very natural. That was the way I put it.
JEF: Well, that’s interesting, because when I looked at it I thought, gosh, I wonder what I would have felt like at 15 to enter when so many of my peers were older.
NK: Because I had been skipping grades, I interacted with older kids a lot, so for me it was not that unusual. I would say the challenge I faced in going off to school was the challenge that many kids face going off to school—which is going off to school. I don’t know if my age influenced that as much as the fact that going from Winnipeg to the U.S. East Coast is like entering a different kind of environment, a different kind of milieu. That was a big change for me, being away from home, but that’s something that you would experience at 18 or 19 if you went away, as well.
JEF: What line of study did you pursue at Princeton?
NK: I was a math major. That was my major, but there is a wide range of subjects you can take at Princeton. I availed myself of that, and I enjoyed the experience as a result. I loved the fact that you were able to do lots of different things as an undergraduate, but my major was mathematics.
JEF: And then you went on to graduate school at the University of Chicago?
JEF: How did you choose Chicago?
NK: You know, it was based on a principle that my professors in Chicago, I am sure, would approve of. They offered me more money than other people [laughs]. I got into a range of schools, and there were a lot of good choices. I was lucky to have a lot of good choices available to me, but Chicago was the most competitive. They offered me a fellowship of $6,000 a year, and that seemed like a lot of money at the time [chuckles], and so I went to school there.
JEF: And it is a fabulous school, on top of it.
NK: As I said, I had a lot of good choices. Chicago was certainly a very good one. I was very lucky, I would say, because after going to Chicago, I appreciated it a lot more than before. It was shocking, in my ignorance of all the choices that I had. I would say that towards the end of my career in academia, I was really struck by how much more educated our applicants to graduate school are now. You know, the Internet and I think the flow of research into undergraduate programs have made them much more aware of what they are going to get into at the graduate level than I was. I knew I wanted to go on and study more economics. I liked the way it combined mathematics, which I was majoring in, and the study of social problems. Chicago was just, in the level of seriousness and rigor of thinking, a real positive for me in a way that I had no way of knowing before I went. I went because of the money, but I stayed because it was a great environment.
JEF: And you graduated with a degree in …
NK: … in economics.
JEF: And where did you go from there?
NK: All over the place. So let’s see—so my first job was at the Kellogg Graduate School of Management at Northwestern University, where I was an assistant professor in the finance department. Then, my wife was also getting her graduate degree at Chicago—my wife-to-be, I guess, at that point—and we wanted to get jobs together. So then, after I’d spent three years in Northwestern, she was getting her Ph.D., and so we looked for jobs together at that point. We went to the University of Iowa, where we spent five years as assistant professors. Then after that, we next moved up here where I worked at the Federal Reserve Bank of Minneapolis as a researcher for a couple of years, and then I moved to the University of Minnesota.
JEF: You were also at Stanford University?
NK: I was at Stanford in the early 2000s. I went there from 2002 to 2005, as a professor. So it was sort of an interregnum in my Minnesota stay. We moved to Minnesota in January of 1996, and then there’s a three-year gap that I spent in Stanford, which I enjoyed immensely. But my wife’s family lives still very close to here. They live in Cedar Falls, Iowa, and we thought we wanted to be back here.
JEF: What, particularly, drew you to the University of Minnesota?
NK: Oh, the University of Minnesota is one of the … it’s just a great institution in economics. If you do economics, especially if you do macroeconomics as I do, it’s one of the preeminent institutions. It was a huge honor for me to be hired at, first, the Federal Reserve Bank of Minneapolis, which has a great research reputation, and then to be able to work at the University of Minnesota. It is sort of like a dream come true, I would say.
JEF: I was struck, too, in talking to people like Art Rolnick and Gary Stern and others at the close relationship between the University of Minnesota and the Federal Reserve Bank, which is probably not necessarily true in all of the other Federal Reserve cities with local universities.
NK: No, no—it’s been a huge positive. I’ve been a beneficiary—now in my new job as president, I continue to foster and facilitate that relationship. I am sometimes asked by my colleagues as fellow presidents about how does that work, how did that happen, and it’s really a ground-up kind of thing. People like Tom Sargent and Neil Wallace and Chris Sims started coming over here and found the problems of interest. The Bank found what they were saying about those problems to be of interest, and so you start to have that growth. I think that other Federal Reserve Banks have certainly tried to replicate it. I think that they’ve made some progress, but they haven’t been as successful as us. Part of it is, I think, the culture in both institutions, and then part of it is just luck. When you look down the river, you see the University of Minnesota. If you’re a good walker, you could walk the distance from the Bank to the University, but you can drive it in five minutes, and on that kind of proximity the relationship is partly built. I may be mistaken, but I don’t think any of my fellow Reserve Bank presidents have that luck, to have such a great department within walking distance away. It’s great.
JEF: There must have been, too, a convergence of interest between the research agenda at the Bank, as it evolved over the years, and the University itself, so that they became partners in some sense. Was that true, or not?
NK: I think that there’s some truth to that. That makes it sound like the problems that we were interested in at the Bank helped shape that agenda, which I don’t think is accurate. The attitude of the Federal Reserve Bank of Minneapolis toward its research department was basically—we’re going to bring in smart minds and they can work on whatever they want. We’ll expose them to the problems that we are facing, and they will end up saying smart things about that, but they’re going to end up saying smart things about a bunch of things we can’t think of either, as the leaders of the organization. And that’s been the attitude throughout, and it continues to be the attitude.
The research agenda, so to speak, that our researchers work on, the problems that they find interesting, certainly spill over to what the University finds interesting. There’s a lot of back and forth. I was hired here in 1996 as a researcher. The attitude was not so much—boy, this guy, Kocherlakota, what he’s working on as a scholar can immediately form policy decisions for the Federal Reserve System. It’s more—no, he’s got the right kind of attitude toward scholarship and research. We probably will find him of use in the questions we have. I trust that that was true for my bosses [chuckles].
JEF: [Chuckles] Clearly. It would certainly seem to be. How did you come into—I want to say “fall into,” but it was certainly more than that …
JEF: … into the job of—suddenly, here you are coming from the academy. You are certainly working with the Fed, so you were not unfamiliar with the way it works. But your background, as I understand it, is not necessarily one that is shared by all of the presidents of the Federal Reserve Banks in general, some of whom come out of the securities industry or are bankers or lawyers or whatever. That must have been an interesting thing, too. What do you think brought that about?
NK: On the one hand, you have to ask the people who hired me, but let me talk about my own thinking on this. I became president in October 2009. If you had asked me in October 2005, just to name a date, if I was interested in this position, I would have said that I’m glad we have these really great people in this job, but it’s not a job I’m interested in. I would have noted that I was working on a research agenda I found of interest in academia, and I was working with students that I found engaging. It seemed to me that the problem with monetary policy, which is a huge chunk of what I do in my job now, was a solved problem. It was an important problem, but it was largely a solved problem. We had really good people working on it and dealing with it. The Chairman at the time was Alan Greenspan; Chairman Bernanke I knew, and also my boss, my president, Gary Stern. These were all very high-quality people implementing what was known. Then things changed, shall we say. In late 2008, it became clear that we were starting to embark—and it’s lasted much longer than I would have anticipated at that time—into the use of rather unconventional tools. To say that we knew how monetary policy was working—it was less clear, shall we say, at that point. There were also the surrounding aspects of the financial crisis that were very important for this country. I remember that I was doing an interview on NPR [National Public Radio] in October 2008. I was asked about what I was thinking as an academic as I looked at what’s going on. I said, I feel frustrated about my inability to be of service at this stage. I feel like I have knowledge that can be of help to my country in a really critical time, and I wish I could be—and that’s what drew me to want to be interested in this job. There’s a little bit of cockiness and arrogance associated with that, but you feel like—why I’ve worked for 20 years studying monetary economics, financial economics, banking—somebody like me should be of use. And, fortunately, the board of directors here and the Board of Governors in Washington agreed with that perspective, I guess.
JEF: They clearly agreed.
NK: With that said, I want to be clear about what’s happened around the Federal Open Market Committee. There’s a wide range of perspectives, as you suggested. Certainly we have some lawyers—Governor Daniel Tarullo and Governor Sarah Bloom Raskin are both lawyers. We have some people who’ve worked in a wide range of Fed operational positions, like President Sandra Pianalto in Cleveland and President Esther George in Kansas City. Some people worked in the securities industry, as you say. I love the fact that there is this wide range of perspectives. I think it’s hugely beneficial. I wouldn’t want 19 clones of myself or 18 other people like myself around the table. With that said, a lot of the people who have come through the Federal Reserve System have come through the research ranks, so President Charlie Evans in Chicago and President John Williams in San Francisco—these are people who have worked primarily in the Federal Reserve System, but they’re extremely well-known researchers in the academic community.
I think if you go back you can give a lot of credit to Art Rolnick and Gary Stern for this—the line between Fed research departments and the academic departments has really become very blurred. And so, somebody like John Williams, and Charlie Evans for that matter, are incredibly distinguished scholars in academe as well. And I’m leaving out some of my other colleagues, which I shouldn’t do. There are James Bullard in St. Louis and Jeffrey Lacker in Richmond, also. If you look at the Board of Governors, Chairman Bernanke certainly was one of the top scholars in monetary economics in the country, and Governor Janet Yellen—so, there’s just a wide range of perspectives, or people who I would say—Charlie Plosser is another name that comes to mind—that come to the job of making policy in a very similar kind of way: I’ve done research in this, know the academic literature, and that’s my starting point. It’s not the ending point; that’s my starting point. And then there are others who rely more on a vast array of real-world experiences. I would say President Richard Fisher [Dallas] and President Dennis Lockhart [Atlanta] are more in that range. So there’s just different kinds of experiences people bring. It’s very positive, I think, for the Committee to be able to draw upon that.
JEF: But when you moved into this job, it must have been quite something. One thing I sort of heard you say before was that in 2005 there really wasn’t much challenge for you. You looked at it and said—problem solved. And then, by 2008 or 2009, suddenly there’s challenge! 6
NK: Well, that’s right. So that’s just focused on the policymaking perspective. And that’s correct. I would say with hindsight I was wrong in 2005 [chuckles]. But, certainly, I didn’t need to have the benefit of hindsight to realize in 2008 and 2009 that the challenges were there.
JEF: How has that evolved in the years since that? As this has progressed, as you mentioned just now, for most people it hasn’t gone quite the way everyone thought it would.
NK: Yes, I know. I think that if you’d asked me in 2009—people often ask me what is the big surprise for you since taking the job, and I think the slow pace of the economic recovery has probably got to be the biggest surprise. On the one hand, as we pointed out, there are a lot of examples in economic history of countries recovering from financial crises of the kind we went through, and the recovery is often very slow. At the same time, I think the Federal Reserve, in particular, has been fairly aggressive in the kinds of action taken. It has been appropriately aggressive in trying to provide support to the recovery. And so, I think that the fact that the recovery has been as slow as it has, despite how accommodative and aggressive we’ve been on the policy dimension—at least the monetary policy dimension—that’s been a surprise to me.
In some sense maybe it shouldn’t have been a surprise, because a lot of countries face these same problems, but it has been a surprise.
JEF: The other thing involved … I’d love to hear your thoughts on it—are the global ramifications, because, of course, the Federal Reserve is now dealing—and it probably always did, but in a very different way—with the global realities of the world economy. I mean, just this morning in the Wall Street Journal—you can’t pick up anything that doesn’t talk about Cyprus or Greece or the eurozone.
NK: Yes, it’s hard for me to draw the contrast back to the past, but it’s certainly true now that events in Europe and events in other parts of the world are important elements of Federal Reserve deliberations. But I remember back in the mid-1990s the Asian crisis that was taking place at that time certainly was very much on the radar screen of the policymakers in Washington. It was a subject for discussions at that point in time. What has changed probably more is the media coverage of these kinds of events and less what’s going on around the FOMC table. I think the members have always been very alive and very alert to what’s happening.
No, I think the surprise of the last five or six years has been countries like Iceland, countries like Cyprus, that develop these enormous banking sectors relative to the size of their economies. Banking sectors that they … we talk about too big to fail. Their banking sectors are too big to save, relative to the size of their economies. So it becomes somebody else’s problem, immediately. And then, how you treat that problem can influence how depositors and lenders to institutions in other countries are thinking about how you’re going to treat those problems. And so, relatively small parts of the world can actually end up having these feed-back, spillover effects around the globe. But I think this is, as you suggested, an amazing demonstration that the Internet world immediately delivers all this news to you in terms of a piece of information in a way that I think was much less true 15 years ago.
JEF: When you arrived at the Bank—you had familiarity with it because you had been working with the Bank for some time—were there any particular pieces of it that you kind of thought you might like to address in some way? Did you feel that there were some things you’d like to expand, things you’d like to change or refine, or whatever? Did you see pieces of it that you really wanted to put your stamp on?
NK: The department I was most familiar with was research. But let me back up and say one thing about that, which is—you’re not taking over from somebody who’s had to leave because things are going badly. Gary [Stern] was leaving the job because he had reached a point at which he was leaving because of his age. That was it. So, you’re coming into a situation in which the institution is well-run. People are happy employees, with good morale, and so there are a lot of good things and you want to be really cognizant of that when you come in.
I had a sense that I wanted to expand the research department beyond the size it had, and the expansion of the research department was motivated by the idea that I think it was going to be easier for us to make use of the lessons we were learning in academia about how most effectively we could do policy if we had a broader range of research interests represented among our staff. So that was my first thought, coming in—working to grow the research group. Part of this is, I think, what I would call the “Old Doc, Young Doc” phenomenon. Gary had this wealth of experience that he could draw upon as a monetary policymaker, whereas for me, I have to rely less on my experience, which I’m developing now, and more on the stock of knowledge out there in the world that’s been developed. The through-put for me to get that is from the research department. So I think it was easier for Gary to go off to Washington—he was certainly relying on the research department, don’t get me wrong, but he also had his 24 years of experience. So that was the starting point.
I thought the Federal Reserve made a number of really good moves in the fall of 2008, in terms of really helping and buttressing the economy in the face of what was a bad crisis, but could have been much worse without the actions of the Federal Reserve. I think that where we could be faulted is that we were not as effective as we could have been in September and October of 2008 about communicating why we were doing the things we were doing. We were doing things, and they were in the national interest, but I don’t think they were well-understood for being in the national interest. I think those events really underscored for me that I don’t think the Federal Reserve System is a really well-known, well-understood organization. I felt we needed to do a better job in terms of communicating what we’re doing and who we are, and so that’s shaped, also, some of the moves we’ve been making in the last three or four years. I think that we’ve been much more active in terms of outreach and listening to what’s going on in the district, especially. But also trying to communicate more broadly in the district about what’s happening in Washington, why we’re doing the things we’re doing and so on. Communication doesn’t solve every problem by any means, but it’s a huge start, and I think that if you don’t communicate you have no hope of being understood, and so other people are going to describe you instead. This is hardly my own realization, in the sense that as I look around the System, this is a broadly understood message.
A number of my colleagues are trying to be more active on this—a number of my fellow presidents are being more proactive in this dimension. I would say what has struck me immediately on becoming president is—boy, this is a group of highly dedicated, highly effective people. The best way to lead in this organization is to stay out of the way and let people do their job as effectively as they can, because it is that kind of group.
JEF: You’ve just been talking about some very interesting things, too, because as I understand it, one of your missions has been to get out in the district more than some of your predecessors may have done, and that’s interesting because it is also, I think, probably the largest district in the Federal Reserve System; I mean, it’s huge.
NK: It’s the second-largest. The San Francisco district is larger both by population and by area. A lot larger by population [chuckles]! But you’re right, we’re an enormous district by area.
JEF: I think Missoula to western Wisconsin is a world of difference, in some ways.
NK: It is. For instance, we have a branch office in Helena. If I fly to Helena, that’s as long a trip in terms of air miles as when I fly to Washington, D.C. So that’s large. As you suggest, there’s a lot of heterogeneity in terms of economic experience, but also the way that people think about things is different, as is natural, across the district. I’ve enjoyed it immensely. It’s been a great learning experience for me, and I think people are genuinely appreciative, too, of having the opportunity to interact. They don’t agree with everything we’re doing, necessarily, but they are generally appreciative of the fact of having someone come and try to talk to them about what we’re doing.
JEF: As you go out in the district, though, how do you tailor messages to … I mean, to the fact that, at least to me as a layperson, what might be on the minds of people in central Montana might be quite different than what’s on the minds of people in the Upper Peninsula of Michigan or here in the Twin Cities?
NK: I don’t do a lot of tailoring of that message. Our policy is not being made for the benefit of any particular city in the Ninth District. It’s being made from a national perspective. So what you’re trying to do, I think, is to deliver the message about what’s happening in the national economy, which might be different from when you go out to western North Dakota, for example, where they’re having an oil boom. What’s transpiring there is very different from what’s happening in the national economy. So you have to remind people, I think, about what’s not always front and center in their thinking. You have to remind them about what is happening nationally and the fact that we’re motivated by those national considerations in making policy. So, I don’t think I do a lot of tailoring of the message.
I generally start out my speeches by talking about what is the Federal Open Market Committee, what is the Federal Reserve, how does it work—because there’s a lot of mystery and confusion about these sort of questions, and it’s important for people to understand that. And then, articulating that, our objectives are these national economic objectives. And then I talk about how our policy actions are designed to get there. I think people get that. And what I will say in response to you, too, is that you’d be surprised by how much the questions are the same in varied parts of the world. You might be living in Houghton, Michigan, or in Missoula, Montana, and people are not always completely aware of everything that is going on in the national economy. But, with that said, people are tracking this fairly closely, and the concerns that people have about the national economy in the eastern part of our district are not that different from what people have in the western part of our district.
JEF: That’s interesting. That’s a local view of globalization, too … things are much more integrated than one might think.
JEF: Well, for instance, just to bring it down to the ground, tomorrow you’re going to be addressing the combined chambers of commerce of Edina and Bloomington and Richfield.
JEF: What are you going to tell them? What is your message tomorrow?
NK: I’m going to talk about the fact that when we make monetary policy, monetary policy operations have a one- or two-year lag. So that means that to judge what we should be doing with monetary policy, you have to be forming an outlook for what’s going to be happening over the next year or two. I’m going to discuss my outlook for the next year or two, which is pretty similar to what it was two or three months ago when I was talking about it. The punch line on it is that inflation is going to be running low, relative to our target. The FOMC had the target of 2 percent inflation, and our outlook is that inflation is going to be running below that over the next year or two. And then the unemployment rate is going to continue to be elevated, relative to what we consider to be our long-run normal unemployment rate. You know people look at our monetary level of policy—I just talked about it as being aggressive, but both of those features, the fact that our inflation is too low relative to our target and unemployment is too high relative to our target—both of those point in the same direction that we actually need to be even more aggressive than we are being. And so that’s what I’m going to talk about.
JEF: Do you find … it seems to me, once again as a layperson, that there’s more cognizance of the Fed and its operations today than there was 25 years ago, that people are more aware of it. I think years ago no one would have known who the Chairman of the Fed is. I think starting with Paul Volcker, Greenspan, certainly Bernanke, many people know who it is. Do you find that when you’re giving speeches … for instance, every morning when I open the Wall Street Journal there’s an op-ed piece on the Fed—it’s too aggressive, they shouldn’t be buying—do you get questions in groups about that?
NK: Oh, absolutely. I think people are, as you suggest, much more knowledgeable about what we’re doing. I think it reemphasizes the need for us to be communicating, because otherwise the Wall Street Journal op-ed page is going to be where people get their information about what we’re doing, and not all those pieces of information are reliable, I’ll say [chuckles].
So, I think it is incumbent on us to push back on that. I think it’s great for people to have the opportunity to ask me about the source of the disconnect between what I’m saying and what they read in the Wall Street Journal. And I think it’s great for us to be able to have that conversation.
JEF: That’s a fascinating view on it, because I really do think people are more cognizant of what’s going on today than they’ve ever been before.
NK: I think that happened in 2008, where the Fed took, I think, necessary but unusual steps to support the economy. I think that’s the source, the media source, of a lot of the fascination with the Federal Reserve. I don’t think people were aware—and by people I include our overseers in Congress, for that matter. They weren’t aware of all the powers that the Federal Reserve had, powers that we use for good, to support the economy. Those are powers that people, even in Congress, were not aware that we had. And I think that usage of those powers has alerted the people to the fact that the Fed is an important player in the economy, and they have to be monitoring it. One thing it’s done … one bad thing that it has done is that I think people are not really aware of all the limitations in what we do. And I would say here that I am talking about even professors of economics who, when I talk to them, will suggest things that we’re not able to do. I think there’s been a growing trend of interest in this, going back to the previous Chairman, Alan Greenspan, but then the events of 2008 really brought the Fed into sharp focus.
JEF: Talk a little about, too, as the Fed plays its role, the importance of its relative independence. I mean, you don’t come up for budget talks. Congress can’t, as I understand it, say that they are not going to give you money if you don’t do what they want. That has to be an important part of its makeup and its ability to do some of the things it’s done.
NK: I think it’s essential. I think that there’s a lot of academic work on this that indicates that having this independence keeps the Fed more focused on the medium term and the longer term than on the short term. I think that has been a real positive. Our job is relatively technical and well-defined. It doesn’t mean that we don’t disagree about it, because even technical and well-defined jobs can have elements of disagreement. But we know what we’re supposed to do. We’re supposed to be promoting maximum employment, promoting price stability. Promoting price stability, we’re even more concrete than that—we’re trying to keep inflation at 2 percent. That’s a very well-defined goal relative to the host of other considerations. If monetary policy is being set by political forces, a lot of other things start to get into the mix that I think aren’t healthy. So it has been a real positive for us to be able to do what we’re able to be doing without so much interference. That is not to say we’re not accountable. We are accountable, and the Chairman of the Board of Governors has a term of four years. At the end of that four-year term, if he or she is not doing a good job, they may not be renewed. Chairman Bernanke went up for renewal in 2010, and he got reappointed by the president of the United States and reconfirmed by Congress. That was a vote of confidence in what the Fed does. So it’s not that we’re not accountable. We are accountable, but we don’t have to be thinking every second of every day about what are the voters going to be thinking about it, and that kind of insulation from short-term political considerations I think is very positive.
JEF: As a president of one of the Fed System Banks, who do you really define as your constituency, or core constituencies? Is a lot of it upward, a lot of it outward—within the region as opposed to Washington? Who would you say are your constituents?
NK: That’s a great question. I think of my constituents as being members of the Ninth District, but I am going to say maybe in a different way than you mean. My job is to learn from my contacts in the Ninth District about what’s happening in the Ninth District economy and take forward that information to Washington. So that’s part of it. When we meet in the Federal Open Market Committee meeting and talk about monetary policy, each of the presidents speaks in turn, and most of the time they’ll talk about local economic conditions. They’re going to bring forward information about local conditions to the national level. Now why we’re doing that is not because we’re going to make policy based on any particular district, but rather because that local information can be a very useful leading-edge indicator of what’s going to be happening nationally. So that’s one way the Ninth District is my constituency. That’s what I’m responsible for learning about when I go to Washington.
The other way I think about my constituency is that I’m responsible for communicating to those people about what we’re doing in Washington. If I get an invitation from a small town in the Ninth District, that’s much more elevated on my radar screen than if I get an invitation from a small town that’s outside of the Ninth District. And it’s because I view it as my job to be talking to the Ninth District about what’s happening in Washington. Now, let us think about the case of unemployment, and right now unemployment in the Ninth District is pretty low. It’s running below 5.5 percent, whereas in the nation it’s closer to 8 percent. Now, when I go to vote on policy, or discuss policy in the Federal Open Market Committee, which number do I think about? I think about the 7.7 percent. I think of the national unemployment rate, not the local rate, so I’m not making monetary policy based on economic conditions within my district. One of my jobs is as a two-way communicator from the district to Washington, back from Washington to the district, and that’s the sense it’s my constituency.
JEF: At the end of the day you are running an institution, with real employees.
NK: Absolutely. Absolutely. That’s a part of the job that has been new. The policy side has been … while it’s been a learning experience, it’s been fairly familiar to me. A lot of the questions and the analysis is similar to what I would do in academia. The part of the job where there has been a big learning curve for me has been more on the management side. And the good part of that—and my board of directors knew this when they appointed me—is that we have a great management team in place here in Minneapolis, and they’ve been a huge source of support and also learning for me as I’ve gone forward.
JEF: But it must have been one of the interesting things as you settled in. I think that was indeed pointed out when you came in, what an interesting choice it was, coming out of the academy, because academicians, however prominent, are not usually running large organizations, unless they become the president of a university. They are not running big organizations like a corporation, which this Bank is.
NK: That’s right, and, you know, as I said, it has absolutely been a learning experience for me. With that said, I think that your role as a chief executive officer is largely to be providing high-level vision for the organization. Providing thought leadership for the organization, and I’ve certainly learned a lot in that dimension. As for the operations side—each of the presidents has a chief operating officer, and those are outstanding. My own chief operating officer, Jim Lyon, is—I’m sure my colleagues might say the same about their people [chuckles] —but I will say that it’s uncontroversial that Jim is the best, so that’s been very beneficial. So on the operations side, we have a lot of support. I think on the thought leadership side, sort of the vision for the organization, that’s what I think the CEOs bring, and that’s certainly been a learning experience for me, but as an academic you’re drawn to the vision thing, shall we say.
JEF: Talk a little, if you would, too, about centralization, and by that I mean as you look at the Federal Reserve System, as I look at it from the outside, and perhaps others as well, you wonder why the British, the French and many others have a single central bank. Why is it different in this country—is it just because it’s large, geographically? What is the strength that the Federal Reserve System derives from not having a single bank in Washington or New York and nothing else?
NK: I think the strength lies in the monetary policy dimension and in the supervision dimension. I think that—I talked about this two-way communication earlier. I think having someone based in, I’ll say the Ninth District, who is going to Washington, helping to make policy there, but at the same time understands what’s going on in the district and can talk about district economic issues and concerns, I think it makes people feel like monetary policy is not just being made by folks in New York or folks in Washington. And that’s why the System was set up this way, to give buy-in to the local communities into what was being done, and I think it’s been successful in that dimension. If you did it again, would you set it up in the same way? Probably not. But I don’t think that’s the right answer. We have the way it is set up right now. Do you want to pay the costs of resetting it some other way, and I think there the answer is—no, I don’t see what the gains would be. And then on the supervision side, supervision is run out of the Board of Governors in Washington. On the monetary policy side, we’re independent. I go to Washington as an independent, and in 2011 I dissented from the vote; I voted against the policy action. And that’s my right and duty as an FOMC member. But as to the supervision—I work for the Board of Governors, which is again, I think, an appropriate assignment of decision rights, but I think it’s really valuable for our local community banks to feel that they have this kind of presence here in their local communities. It’s not somebody flying back to Washington to make the decision. It’s really someone grounded in the local communities that is making the decisions on the supervision side.
JEF: Looking at another level of that, it seems to me that there must have been some change, however, in the feeling that there needed to be branches of Banks within regions. I remember, when I interviewed Gary Stern the first time, that they were just completing a big new branch in Helena. But, as I recall, the New York Fed closed the Buffalo branch and that no longer exists. What role is there for those branches, such as they exist within regions?
NK: The fact of the matter is, in Helena our footprint has shrunk. That’s definitely right. With that said, we just talked about the distance between Minneapolis and Helena, and I think it’s valuable for us to have this kind of local presence in order to better inform the dialogue that we have with the citizens of Montana, among other things. So I think that that’s the value we have in our branch office. If you look around the System, I think a lot of the branch offices have been shaped more and more to being outreach headquarters more than anything else. The big change, though, since you talked to Gary, and it’s even more recent than that, is the scope of our check operations—the decentralized function of processing checks. This building has a very large check operation, or used to. It has the possibility of having a large check operation, but doesn’t anymore. So that’s made a big change in staffing, and it’s made big changes in the nature of our footprint around the System. In terms of operations, what we do in Montana and Helena is cash processing. Given the distances we have in the System, it is pretty hard to figure out how to do it any other way. The cost-effective way to do the cash processing we need to do, given the distances, is to have something like what we have in Helena. So that’s the starting point, but even without that, I think that having some kind of base operations in Montana is very, very valuable.
JEF: As you look at the role the Fed plays, its evolving role, I’ve got kind of a two-part question. First of all, what direction do you see evolution in the Federal Reserve System moving in the next few years? Playing seer is always difficult, I realize. But secondly, are there things the Fed isn’t doing that you feel, particularly with your remarkable background, it might do, where it could have a beneficial effect, but that it hasn’t been called upon or has decided not to do?
NK: That’s a good question. I’m not struck right now by things that the System could be doing that it’s not doing. I think we were given a lot of new assignments. In 2010, in the wake of the financial crisis, Congress passed what’s called the Dodd-Frank Act, named after Christopher Dodd and Barney Frank. It brought enormous changes to the regulation of our financial sector. The biggest changes in 75 years, probably. And a part of that was that there was a real recognition by Congress that part of the challenge in 2008 was there wasn’t enough information flow, at a Systemwide level, about what was going on in the financial system. There was a lot of institution-specific knowledge, but how those institutions were joining together and how an institution like Bear Stearns was critical to the functioning of the whole financial system—that was less clear.
The Financial Stability Oversight Council was trying to keep track of all of this, but the Federal Reserve System is really much more alive to what we call macroprudential regulation, the need to be keeping track of the connections and thinking that through when we’re doing supervision. This is a very hard job, and I think it’s a very demanding job. It’s one we welcomed, it’s one we wanted, but it is a very demanding job from a human perspective, and I would say that I’m not rushing out for more things to be put on our plate at this stage.
So that’s on the one hand. On the other hand, what are we going to be doing in the future—what will we be like in the next five years? I don’t see major changes—probably people always answer this question this way—but I don’t really see major changes in the next five years. I do think there are questions about the next 20 years. What will the Federal Reserve System look like? Will it look the same as it does today? I think we’ve seen a lot of centralization of functions in the last 10 years, with checks being the most noticeable. How will that process unfold going forward? And what will it mean for individual Reserve Banks? It’s not something I think about over the next five years, but rather over the next two decades. I think it’s an interesting question.
JEF: How does the increasing globalization of the banking industry and virtually everything else, it seems, affect this? In the sense that the Federal Reserve, like the Bank of England, like the German Central Bank, et cetera are national institutions, that it looks, from the outside, at least, are being forced to act more globally, simply because they’re so interrelated. How do you see that impacting the Fed and its structure and the things it does in the next 20 or 25 years?
NK: I’ll answer that in two ways. One is that what’s happening internationally affects what’s happening nationally, in terms of what’s happening in the economy. So right now Europe is going through a very low-to-negative growth experience. That means they are having less demand for American products, and that is adverse for our economy as well. But it’s still true—and I think this is going to be true at least over the next five years—over the longer term it may be less so, but it’s still true that that immediate impact on us is relatively limited. We’re still, roughly speaking, a closed economy from the point of view of just goods trade. We are manufacturing things and creating things for others and shipping it overseas, and they are doing the same for us. That exchange, because we are so large as an economy, is a fraction of the world economy, and it’s still true that a lot of that happens within our shores. Over time, if you look over the next 10 or 20 years, you know China is going to grow bigger. It’s going to be true that we’ll be a smaller fraction of the world economy, and the point I just made will be less true, probably, in 20 years.
But the biggest effect for the Fed is the international integration of asset markets. And that’s where, I think, there is really the big challenge for us. That’s true right now. It’s hard to think how they could be more integrated, but maybe they could be. The fundamental forces we’re dealing with are that we’ve been lowering interest rates—everything we’re doing is to try to lower interest rates. We’ve said we’re going to keep rates low until unemployment falls below 6.5 percent. We’ve been buying long-term assets to drive down long-term interest rates. Why we are doing that is because of pressures in international asset markets that are driving down interest rates. We’re actually chasing the interest rates down rather than anything else. We can’t think about just dealing with a U.S. interest rate. It’s really an international issue for us. That’s going to continue to be true in the next 20 years. I think we’re going to have to keep on explaining to people that the demand for financial assets is really an international phenomenon, and that’s something that we have to be thinking about in a global perspective.
JEF: And it’s got to be a challenging balancing act, too, because at the same time one reads about the Fed’s actions, you read about the effect that that has had on the income received by pension funds and all this sort of thing, where all of a sudden they are also scaling back their long-term projections as to what they, in fact, could promise the people whom they serve.
NK: Again, this is on me as much as anybody else. I don’t think we’ve been as articulate as we could be about the fundamentals of what’s driving that. Why is it that savers are earning so little? Fundamentally, it’s because everybody wants to save, and the Fed is responding to those forces. We’re the ones who lower the interest rates. But why are we lowering interest rates? It’s in order to keep unemployment low and to keep inflation close to target. The reason we have to lower interest rates in order to achieve those goals is because of the same forces that mean that savers are earning very little income. And that basically comes down to the fact that everyone wants to save and not spend. And if you’re trying to do something that everyone else wants to do, you want to buy the same good as everyone else, you’re going to pay a high price and get a low return. And that’s what’s happening to pension funds, to savers, to anyone who wants to hold assets. They’re trying to do the same thing that everyone else wants to do, and the challenge we’re facing in the post-2008 world is that the demand for savings is really high around the world.
JEF: What do you see as your biggest challenges in the next five years, in your position right here?
NK: It’s a good question. I think that the right answer is to have the right mix between change and nonchange. I think that your job in one of these positions is to be a change leader, and there’s a tendency, as you spend a longer time in a job, to not see that as clearly. You get comfortable with the things you are doing as time goes on. You want to fight that. I would have to say, though, I’m more of a changeophile, probably than most people, and I have to always guard against that, too. So I would say that my biggest concern over the next five years is that I remain sufficiently open to change, but also not too open to it. I think that’s the balancing act for me, going over the next five years.
JEF: Does that drip over into your travel schedule? I often have noticed in dealing with a lot of corporate history that sometimes a CEO—admittedly at a large public company or something—will come in and feel that they’ve got to get out and see the plants and see the troops. Five years later it’s sort of like, well, I’ve been to Des Moines, and I don’t really need to go back again. Do you see it that way?
NK: This is a great question, and I think that you have to guard against that constantly. I was familiar with it as a teacher. You’ve given this lecture to last year’s students, but it doesn’t mean you shouldn’t be giving the same thing to this year’s students [chuckles]. You have to be careful and not to say to yourself—well, I’ve been to Sioux Falls, I’ve been there a couple times—do I ever need to go again? The answer is yes, yes. You’re not going there as a tourist. You’re going there because it’s a source of information and what’s on the ground there will be changing, and you need to be aware of how frequently it changes. I’m not saying you have to be there every six months, but going there every three years or something like that on a cycle I think is valuable. I see myself as being very engaged, very interested in continuing to travel around the district.
The speech I’m going to give tomorrow has a lot of similarities to the speech I gave in January. You have to fight the instinct in yourself that it gets pretty boring to be giving the same speech again, but it’s new to the people in the audience, and you have to say, if you’ve hit on a good way of saying things, which we like to think that we did in January, we should be willing to say it again. And the same thing is true with the travel schedule, although there is possibly another consideration, which is that maybe the people in Sioux Falls feel they’ve seen me enough [laughs]. That’s a different thing to navigate. But, on my end, I think it’s still very important.
One of the things which is true is that actually my travel schedule has changed. I travel a little more than I did in academia, but in some sense it’s a little friendlier, because a lot of my travel before was for longer periods of time and over greater distances. Traveling the district is pretty easy. I mean you get on a plane—on April 2nd I’m going to Grand Forks. Well, that’s pretty easy, right? It’s an hour-long flight each way, so I’m gone for one night. That’s much more manageable. In my academic schedule, often I would have to be traveling overseas and it would take me away from home for much longer periods of time. Actually, I would say both my wife and I are more comfortable with the travel schedule I have now.
JEF: Well, what haven’t I asked you that you thought I would, or that you’d like to comment on that goes beyond what I’ve mustered up in the questions I’ve asked so far?
NK: I think we’ve covered a lot of good ground. There’s a lot of good questions there. I guess one thing I will say, that this is a great organization to work for. I love the public nature of it, especially combined with the seriousness and neutrality of it. And the seriousness and the neutrality go together. We talk about it being politically neutral, and I think there’s some skepticism and cynicism about those terms in the outside world. But we actually live that. We’re always making sure that we’re thinking about things in as neutral a way as possible. Chairman Bernanke has talked about the need to get the fiscal house in order. And that’s a good message, but it’s important for us never to say is it going to be by raising taxes or cutting spending. And that kind of thinking, that I’ve talked about at the Chairman’s level, goes through to the whole organization. It’s a great combination of the fact that you’re thinking about questions, or always engaged in public policy matters, but you’re always thinking about it from a very neutral and therefore very technical way, because it’s the data that matters. It’s the evidence that matters, it’s the information that matters, and your political leanings really don’t matter. And I love that. So as I say, it flows through the whole organization.
JEF: Well, that’s a great benediction. Thank you very much.