September 20, 2013 / 5:50 PM / 4 years ago

Fed's Kocherlakota: options prices key to assessing outlook

Minneapolis Federal Reserve Bank President Narayana Kocherlakota speaks at a macro-finance conference hosted by the Boston Federal Reserve Bank and Boston University in Boston, Massachusetts November 30, 2012. REUTERS/Brian Snyder

NEW YORK (Reuters) - Policymakers should look to options prices to help figure out the future and inform their decisions today, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said on Friday.

The dovish central banker did not comment on his outlook for monetary policy or the economy in his prepared remarks, which were included in a set of equation-heavy slides he presented to an academic conference at NYU Stern.

“Policymakers need some way to gauge the relative likelihoods of future events,” Kocherlakota said, in order to answer questions like “How likely is deflation? How likely is high inflation?... How likely is significant financial instability?”

Rather than trying to figure out the “true” probability of a given event, he said, policymakers should look at how likely households view that event. That information can be found in the prices of options on assets from gold to stock indexes to wheat, the slides suggested.

The presentation draws on research that Kocherlakota has been pursuing for more than a year, and suggests that he pays close attention to financial markets as he formulates his monetary policy stance.

But the talk shed no new light on Kocherlakota’s views on the Fed’s unexpected decision this week to leave its massive monetary stimulus program in place.

Reporting by Luciana Lopez; Writing by Ann Saphir; Editing by Andrea Ricci

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