Federal Reserve Bank official aims to gauge region’s economic health

• Narayana Kocherlakota

Before taking questions from the audience, Federal Reserve Bank President Narayana Kocherlakota presents some basics about the Reserve Bank system at UMD last week. His presentation, “Federal Reserve 101: A Town Hall Meeting,” was part of the Labovitz School of Business and Economics’ 2012-13 Distinguished Speaker Series. (Clint Austin / caustin@duluthnews.com)

Talk about it

The region’s Federal Reserve Bank president was in Duluth last week to do more than kick off a distinguished speaker series for UMD’s business school.

Narayana Kocherlakota, who heads the reserve bank in Minneapolis, was also in town to talk with local business, labor and industry leaders to gauge the economic health of the 9th District, which encompasses Minnesota, Northwestern Wisconsin, Michigan’s Upper Peninsula, the Dakotas and Montana.

Do they have confidence in the economy? Will they be hiring in 2013? Will they be expanding? Those are some of the questions he asks.

So far, he says he’s found surprising diversity in the 9th District, from areas still struggling from the Great Recession, as he calls it, to the oil boom in North Dakota’s Bakken area.

“Western North Dakota is just hopping and facing problems unlike anywhere else in the United States,” Kocherlakota said.

Like a labor shortage.

But that boom — accompanied by high wages, a housing crunch and spinoff business — isn’t being felt much beyond western North Dakota, he said.

In some areas, he’s found recovery well under way from the recession of 2007-09, when Minnesota’s unemployment reached 8½ percent.

“We’re starting to see stabilization of housing prices and an increase in housing prices,” he said. “If I hear the same things around the district and the country, it tells you what’s happening as a whole.”

Kocherlakota (pronounced Koach-er-lah-ko-tah) will bring that information to the table when he meets with the other 11 district Federal Reserve Bank presidents to set monetary policy. The 12 presidents around the country make up the Federal Open Market Committee and meet every six to eight weeks in Washington, D.C., to set policy with the goal of stabilizing prices and reaching maximum employment.

The Federal Reserve Board —“the Fed” for short — can influence the value of the dollar, inflation and interest rates by controlling the money supply. Buying and selling of treasury securities are among the tools the board uses to do that.

Before becoming a Federal Reserve Bank president in 2009, Kocherlakota served as one of its consultants. He was an economics professor at several universities and is a former chairman of the University of Minnesota Department of Economics.

Mixed economic bag

While in Duluth, Kocherlakota said the natural rate of unemployment varies with the times. Currently, with the 2 percent target inflation rate, a 5 percent to 6 percent unemployment rate would be expected. That’s considerably lower than the current 7.8 percent nationwide.

Because the Federal Reserve Board’s actions have generated controversy, the 12 bank presidents agreed to travel their districts to educate the public about what they do and to learn how local economies are doing, he said.

“We didn’t do a good a job communicating about it,” he explained. “Some say the Fed has done too much, tripling the balance sheet, keeping interest rates low. But the biggest economic shock in 80 years required extraordinary efforts.”

He said people can expect inflation to be at 1 percent to 2 percent for the next couple of years. Low interest rates will continue through mid-2015 to encourage people to borrow and spend.

But without enough demand for loans from credible borrowers, banks have more reserves than they’re using.

“Banks say they want credit-worthy borrowers,” Kocherlakota said. “Assets are down because values are down. The median household (assets) is back to the level of the early 1990s.”

Town hall meeting

At a town hall meeting Tuesday evening at the University of Minnesota Duluth, presented by the Labovitz School of Business and Economics, Kocherlakota took questions from among the approximately 250 people who filled Weber Music Hall auditorium.

Should the U.S. go back to the gold standard?

Not a good idea, he said, sitting in a winged chair in a living room setting on stage with moderator Curt L. Anderson, director of UMD’s Center for Economic Education.

“When times are uncertain, people run for safety,” Kocherlakota said. “One of those is gold. It’s the reason why prices go up. The price of gold is driven by people being scared.”

He was asked about the jobless recovery.

As Kocherlakota explains it, the term is used because job creation fell behind during the recession when the Gross Domestic Product fell into the negative percentages. And although the GDP and jobs have been growing, the job growth hasn’t overcome the losses during the recession. The GDP is expected to grow 2½ percent in 2013, which will be better than 2012, but still behind the U.S. average of about 3 percent.

“So it’s not a jobless recovery,” he said.

He gave little hope for those eager to grow their retirement and other savings through earned interest, saying it will take more people spending and borrowing and fewer saving to drive up interest rates.

UMD sophomores Sean Brown and A.J. Johnson were among the many students in attendance. Their macroeconomics class professor had encouraged them to go.

“It was interesting,” Brown said afterward. “It was more advanced but touched on what we covered in class, so I followed most of it.

Although Kocherlakota’s “Federal Reserve 101: A Town Hall Meeting” was billed as a primer for the general public on the role of the Federal Reserve Bank of Minneapolis, some left unenlightened.

Kathy Kollodge and her husband, Ken, a blogger who’s been critical of the Federal Reserve, said they learned little from the meeting.

“I don’t think he answered any of the questions,” said Kathy Kollodge, who asked Kocherlakota how the Federal Reserve creates money.

“I know these are all economists and professors, but they can’t seem to explain it like average people understand it,” she said.

Tom Wiedell of Duluth, however, was enthusiastic.

“I thought it was wonderful to have someone so well-versed on the economy,” said Wiedell, a health-care financial consultant and UMD alumnus. “He was diplomatic. He understood the questions. He had a good grasp with good answers.

“It’s not easy to turn the economy around,” he continued. “These people understand the dynamics and the forces that influence the economy.”

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