Kocherlakota: Fed policy is, if anything, too tight

Duluth, Minnesota Tue Oct 30, 2012 8:57pm EDT

Duluth, Minnesota (Reuters) - Minneapolis Federal Reserve Bank President Narayana Kocherlakota on Tuesday delivered a spirited defense of the Fed's ultra-easy monetary policy and said the central bank may need to do even more to stabilize prices and boost employment.

The Fed earlier this month repeated its vow to keep U.S. interest rates near zero through at least mid-2015 and stuck to its plan to buy mortgage-backed securities to push down long-term borrowing costs.

The asset purchases, launched in September, mark the Fed's third round of quantitative easing since the financial crisis of 2007-2009 and are expected to bulk up a balance sheet already more than triple its pre-crisis size.

Some critics, including several inside the Fed, have said the central bank has gone too far.

"I strongly disagree," Kocherlakota said. The economy suffered an unprecedented shock, its worst in 80 years, and such a shock requires an unprecedented response, he said.

U.S. unemployment, at a lofty 7.8 percent, is well above the level that most economists see as healthy. Meanwhile, most Fed policymakers see inflation at or below the central bank's 2 percent target for the next year or two, Kocherlakota said.

"Given how high unemployment is expected to remain over the next few years, these inflation forecasts suggest that monetary policy is, if anything, too tight, not too easy," he said.

Kocherlakota, who as recently as six months ago called for monetary tightening by the end of the year, last month shocked global markets by urging the Fed to keep rates low until unemployment falls to 5.5 percent, a level widely equated with full employment.

The low-rate vow can stay in place, Kocherlakota said, as long as inflation does not threaten to rise above 2.25 percent.

Kocherlakota's remarks on Tuesday, prepared for delivery to a town hall at the University of Minnesota campus here, cemented Kocherlakota's conversion from a one-time policy hawk to an employment-focused dove.

"We should always judge the appropriateness of the Fed's policies in terms of how the economy is doing relative to the two Main Street goals that Congress has set for the FOMC," Kocherlakota said, referring to the twin goals of the policy-setting Federal Open Market Committee of price stability and full employment.

"Such a comparison," he said, "does not suggest that monetary policy is currently too easy."

(Writing by Ann Saphir; Editing by Leslie Adler)

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