Fed forecasts signal need to tighten: Kocherlakota

PALO ALTO, Calif (Reuters) - The Federal Reserve should reduce monetary policy accommodation next year if the central bank's inflation and unemployment forecasts pan out, a top Fed official said on Tuesday.

Members of the Fed's policy-setting committee see inflation stabilizing next year near the central bank's informal target of just under 2 percent, and unemployment falling a few tenths of a percentage point from its current 9 percent level, according to forecasts published earlier this month.

"In the scenario that the economy evolves in 2012 as the Committee expects, the Committee should reduce the level of monetary accommodation over the course of 2012," Minneapolis Federal Reserve Bank President Narayana Kocherlakota said in remarks prepared for delivery to the Stanford Institute for Economic Policy Research.

The easiest way to do so, he said, would be to shorten the Fed's estimate of the time it expects to keep rates extraordinarily low.

Should inflation drop more than expected, or unemployment rise, the Fed should by contrast add stimulus to the economy, Kocherlakota said.

The central bank could accomplish that goal either by extending its low-rate promise, or by buying Treasuries or housing-sector securities backed by Fannie Mae and Freddie Mac.

The Fed, which has kept short-term rates near zero for nearly three years, in August signaled it would keep rates near zero through at least mid-2013.

Kocherlakota dissented at the time, arguing that improvements in both the inflation and the employment picture since the last time the Fed eased policy require the central bank to tighten policy.

Tuesday's remarks are an extension of that argument.

They come as Fed policymakers debate using forecasts to shape market expectations for the central bank policy.

Kocherlakota has strongly backed such efforts, saying the Fed should publish a roadmap for its policy responses to specific levels of inflation and unemployment.

(Reporting by Ann Saphir; Editing by Andrew Hay)