The Minneapolis Fed is in turmoil after the acrimonious departure of two top researchers in a row that raises questions about its policy direction under president Narayana Kocherlakota.

Patrick Kehoe was dismissed, Ellen McGrattan’s contract was not renewed and the bank’s research director Kei-Mu Yi was shifted to a new position. Both Mr Kehoe and Ms McGrattan rank in the top one per cent of academic economists.

The row matters because the Minneapolis Fed is a leading centre for “freshwater” economics, so-called because it grew up in universities around the US Great Lakes rather than the “saltwater” universities on the coasts. Freshwater economists tend to be more sceptical about the effectiveness of active fiscal and monetary policies.

Although these differences are much less important than they used to be, many hawkish dissents on the rate-setting Federal Open Market Committee come from regional Feds that follow the freshwater tradition, and the changes in Minneapolis show its diminishing influence at the central bank.

The departures follow a sudden shift by Mr Kocherlakota last year when he went from being one of the more hawkish members of the FOMC to a strong supporter of aggressive monetary stimulus.

Ms McGrattan said that there was a big change when Mr Kocherlakota took over in 2009 and limited discussion of monetary policy to a narrow circle of advisers.

“Basically, I have not been involved in discussions in which we would talk about his views,” she said. “Despite my title – I was a monetary adviser – I wasn’t doing much advising.” She said she did not know of a policy reason for the changes. Mr Kehoe declined to comment.

Minneapolis created a new model for regional Fed banks in the 1970s when it formed a close relationship with the University of Minnesota. Economists moved between the two institutions and several of their researchers ultimately won Nobel Prizes, such as Edward Prescott and Thomas Sargent.

“The Minneapolis Fed has always been a place that has prided itself on connecting academic research and policy discussion,” said Ms McGrattan. “How can we keep that going forward if people like Pat Kehoe are fired?”

Stephen Williamson, a professor of economics at Washington University in St Louis, said that the changes risked damaging the Minneapolis Fed as an institution. “This was built up over many years and the quality is very high,” he said, warning that other researchers at Minneapolis could now leave because of the uncertainty.

On his blog, Mr Williamson said that Mr Kocherlakota had “declared war on his own research department” and called on him to resign.

Mary Brainerd, chair of the Minneapolis Fed board, said that it “fully supports” Mr Kocherlakota’s vision for the research department. “Under his leadership, the bank has significantly expanded the size of its research department adding diversity in skills and perspectives,” she said.

“The bank has an exceptional history of contributions in economic research and a valued relationship with the University of Minnesota, and we are confident that President Kocherlakota’s strategy will build on that tradition,” said Ms Brainerd. Mr Kocherlakota declined to comment.

Mr Kocherlakota initially argued in 2010 and 2011 that a lot of recent unemployment in the US is structural, meaning that jobless people will be permanently unable to find work, because they are in the wrong place or lack the necessary skills.

But in autumn 2012 he told the Financial Times that he is “putting less weight on the structural damage story” and argued that the problem was more likely due to “persistent demand shortfalls”. That moved him much closer to the “saltwater” arguments made by economists such as Fed chair Ben Bernanke and incoming chairwoman Janet Yellen.

Get alerts on Federal Reserve Bank of Minneapolis when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article