It sounds like the setup to a corny joke: Why is raising the federal funds rate target like wearing shorts in Minnesota?
But that is precisely the heuristic device used by the colorful and oft-dissenting Minneapolis Federal Reserve president, Narayana Kocherlakota.
In the question-and-answer session following a speech he gave in New York on Tuesday night, Kocherlakota was asked about the theory that one benefit of tightening Federal Reserve policy is that it gives the central bank room to loosen policy if economic conditions so warrant.
Kocherlakota, who dissented to the December Fed statement and doesn't favor a 2015 rate hike, responded that tightening policy should never become a goal in and of itself. And he used a personal story to illustrate that point.
"The first year I lived in Minnesota, when May came around, I figured, hey, it might be time to wear shorts. After all, I'd been wearing pants for a while at that point. So, I put on shorts. And well, let's just say that the next day, I was wearing pants again," he said, to some laughter from the audience.
So what lesson did he learn that chilly spring day?
"The goal is not to put on shorts just to put on shorts. The goal is to have a condition in which it's good to put on shorts—or to raise rates."