UPDATE 1-Fed's Kocherlakota-no impact from rate cut on reserves

By David Bailey

MINOT, N.D. Aug 15 (Reuters) - Cutting the rate paid to banks on the excess reserves they stash at the U.S. central bank would do little to encourage lending because the rate is already so low, a top Federal Reserve official said on Wednesday.

The Fed now pays banks interest of a quarter of a percent on excess reserves kept at the central bank, and some policymakers have suggested that cutting the rate further could prompt banks to lend more of that money out.

"There is some room to reduce that (rate) further as a way to incentivize banks to lend, but there's not a lot of room," Minneapolis Fed President Narayana Kocherlakota said in Minot, North Dakota, where the regional Fed bank's board was gathered for a tour on Thursday of the booming oil-producing region.

"It is a policy tool that is left, but it is a policy tool that I suspect would have only minimal effects on the economy," he said.

The Fed left policy on hold earlier this month, keeping rates near zero but signaling that more stimulus could be on the way should the economy stay weak.

Kocherlakota, who is not a voting member of the Fed's policy-setting panel this year, has in the past leaned more towards monetary policy tightening than toward further easing. On Wednesday he gave little hint of any change of heart.

Unemployment, at 8.3 percent, is "quite elevated," while inflation is running below the Fed's 2 percent target, he said, noting that the Fed has a responsibility both to manage inflation and maximize employment.

It could well be "appropriate" Fed policy "if you might be willing to give a little bit on the inflation one to do a little better on the other one," he said.

But Kocherlakota stopped far short of advocating higher inflation in order to boost employment, an approach embraced by a few of the Fed's most dovish policymakers, including Chicago Fed President Charles Evans.

Asked whether the U.S. economy might fall into a period of so-called stagflation in which high unemployment is accompanied by slow growth, Kocherlakota said he found that possibility unlikely.

"I think when people say the term stagflation they often have in mind something along the lines of what we had in the 70s, that would require bad choices" by the Federal Open Market Committee, or FOMC, he said. "I don't anticipate bad choices by the FOMC, so I don't anticipate stagflation."