Fed's Kocherlakota-effect of more bond buys 'muted'

FARGO, N.D. Oct 19 (Reuters) - The U.S. Federal Reserve may find it tough going if it tries to use a renewed round of Treasury purchases to boost the modest recovery, Minneapolis Fed Bank President Narayana Kocherlakota said on Tuesday.

Kocherlakota repeated his view that the first round of so-called quantitative easing, at the height of the financial crisis, reduced the term premium -- the difference in yields not explained by the expected path of short-term interest rates - on 10-year Treasuries relative to two-year notes by about 0.4 to 0.8 percentage point.

"My own guess is that further uses of QE would have a more muted effect on Treasury term premia," because markets are functioning much better now than in early 2009, said Kocherlakota, who will rotate into a voting seat on the Fed's policy-making committee next year.

His remarks in Fargo were nearly identical to those made last week in Minneapolis.

Kocherlakota repeated his view that weighing the costs and benefits of further asset buying is a difficult "calculus." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

To see where officials stand in debate:

link.reuters.com/ryv97p or [ID:nN01107830]

For more stories on Fed policy, see [FED/AHEAD]

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The U.S.central bank has kept interest rates near zero since December 2008, and bought $1.7 trillion in mortgage-backed securities and Treasuries to pull the U.S. economy out of its worst recession in decades.

But U.S. growth slowed over the summer, and nearly one in 10 in the labor force are unable to find work. Economists see little chance the lofty unemployment rate will move lower any time soon, sparking concern that already low inflation could drop further as households hoard cash.

Most analysts expect the Fed to move to drive down interest rates further with a new round of Treasury purchases as soon as next month. (Reporting by Ann Saphir; Editing Neil Stempleman)