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Kocherlakota won't become Fed's next habitual dissenter

Minneapolis Federal Reserve Bank President Narayana Kocherlakota, whose differences with Fed Chair Janet Yellen over rewriting the central bank's pledge to keep interest rates low led him to cast the sole dissenting vote on Fed policy last week, has no plans to make a habit of saying "no," people familiar with his thinking say.

The Fed had pledged since December 2012 not to even consider raising rates until unemployment falls to 6.5 percent, a move designed to assure investors that rates would stay low even as the economy improved.

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, speaks in St. Paul, Minnesota, Feb. 16, 2010.
Craig Lassig | Bloomberg | Getty Images
Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, speaks in St. Paul, Minnesota, Feb. 16, 2010.

Kocherlakota liked the approach, but lobbied his colleagues to go further by pledging low rates until unemployment rate falls to 5.5 percent, as long as inflation stays in check.

Last week, he lost that battle when the Fed dropped the numerical guidance altogether, and instead said it would take a wide range of factors into account as it assessed how long to keep rates low.

So Kocherlakota dissented, explaining on Friday in a statement that he was worried the Fed's actions suggested it was comfortable with the sub-par state of the economy.

But rather than use his vote at upcoming meetings to drive home his discomfort, Kocherlakota prefers to close ranks and move on.

(Watch: Will the Fed have to hike rates sooner?)

Indeed, he said as much in an interview Friday, explaining his dissent.

"This is a debate that's over," he told The Wall Street Journal.

A lack of dissent from the Fed's most dovish member could prove critical as Yellen keeps winding down a massive bond-buying stimulus and plumbs the economic data for signs that the economy is ready for rate hikes. With no dovish dissent to act as a brake, the path to eventually tighter policy may become that much smoother.

Other Fed policymakers who disagreed with their peers played it differently. Kansas City Fed President Thomas Hoenig dissented at every meeting in 2010, saying the Fed should stop promising low rates for an "extended period."

(Read more: Kocherlakota says Fed intended no policy shift: Report)

Esther George, who took over from Hoenig in 2011, was a serial dissenter against easy policy last year, only stopping when the Fed decided in December to begin paring bond buying.

A long campaign

Kocherlakota had lobbied his colleagues since at least October 2012 to commit to keeping rates at rock bottom until the unemployment rate falls below a threshold of 5.5 percent.

But the jobless rate, which has fallen from a recession-high of 10 percent to 6.7 percent in February, was approaching the threshold so quickly that Fed officials believed the guideline no longer carried much weight.

So last week, at Yellen's first policy-setting meeting as Fed chair, the Federal Open Market Committee members dropped the pledge and said they would look at a wide range of factors to determine the timing of a rate hike, which would in any case not come for a "considerable time" after the Fed wraps up its bond-buying program later this year.

Kocherlakota has made it clear that he would prefer the Fed be more specific about the factors that will determine the rate- hike timetable. He has also showed no sign of deserting his conviction that the economy needs more, not less, stimulus.

A 180-degree turn

Kocherlakota has not ruled out another dissent.

(Watch: Fed's Fisher: Asset buying should end in October)

In 2011, the last year the Minneapolis Fed chief had a right to a vote on the policy-setting panel under the Fed's roster of rotating votes, Kocherlakota dissented on an August decision to pledge to keep rates near zero for at least two more years.

The economy, he thought, did not need the extra stimulus. Still, he vowed to "abide by" the pledge.

The very next month, he dissented again, but this time for a different reason: He disagreed with the Fed's decision to ease policy further with the launch of an asset-purchase program known as Operation Twist.

Kocherlakota stopped dissenting after that, even though the Fed continued to promise low rates until mid-2013 and buy assets under Operation Twist.

After a while, he even stopped publicly questioning the wisdom of easing monetary policy, and by October 2012, joined those at the Fed who fully supported further easing.

He did not dissent again until last week.

By Reuters

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