(c) 2009 Dow Jones & Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.The Federal Reserve hired a respected academic with sometimes-unconventional ideas to succeed its longest-serving regional bank president.
Narayana Kocherlakota, 45 years old, former chairman of the University of Minnesota economics department, will become president of the Federal Reserve Bank of Minneapolis, succeeding Gary Stern, who retired this summer after 24 years in the post.
The university's economics department and the Minneapolis Fed have long-running ties and a successor for Mr. Stern was widely expected to have roots there. The university is part of what is known as the "freshwater" school of economics, named for the free-market departments at the University of Chicago and other programs near the Great Lakes, which tend to take a dim view of the ability of governments to uplift people by intervening in the economy and markets.
Mr. Kocherlakota doesn't fit neatly into the free-market mold. In a paper presented at the International Monetary Fund this year, Mr. Kocherlakota argued that the government was correct to intervene in the aftermath of the housing bubble. The paper also argued that in the case of some bubbles, higher interest rates -- rather than lower rates -- might encourage banks to lend. Mr. Kocherlakota declined to comment.
Many of his papers have been highly theoretical works focusing on imperfections in financial markets. "He's probably the most abstract thinker ever to head a Federal Reserve bank," said Robert Lucas, a Nobel Prize-winning economist and consultant to the Minneapolis Fed. The unconventional world view, Mr. Lucas said, would come in handy because "this is not a time where the conventional wisdom on this stuff is riding high."
Colleagues describe him as pragmatic. "He believes in the freshwater world, but he's not that radical," said Luigi Pistaferri, a Stanford professor and frequent co-author.
The Federal Reserve consists of a board in Washington and 12 regional bank presidents. Five of the 12 presidents each year get a vote on interest-rate decisions. The Minneapolis Fed isn't due for a vote until 2011.
Meantime, Fed officials on Thursday sought to tamp down market expectations that it could be moving quickly toward a rate increase. In comments at the Cato Institute on the Fed's exit strategy, Fed Vice Chairman Donald Kohn emphasized that the economy remains burdened by large amounts of unused capacity and that higher interest rates won't be necessary for "an extended period."
The timing and aggressiveness of rate increases, he said, depended on "how the economy seems to be recovering and the outlook for inflation."
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, added that it was too early to begin tightening Fed policy. "I don't think we are served by declaring prematurely that we're in the clear," he said.
Credit: By Jon Hilsenrath and Mark Whitehouse