UPDATE 1-Extent of jump in U.S. yields a surprise -Fed's Kocherlakota

Wed Jun 26, 2013 8:40am EDT

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June 26 (Reuters) - The extent of the run-up in bond yields after the U.S. Federal Reserve last week announced a plan to eventually remove monetary stimulus was a surprise, Minneapolis Fed President Narayana Kocherlakota said on Wednesday.

The immediate market reaction was "more outsized than I would have anticipated personally," Kocherlakota, a dovish U.S. central bank official who has a vote on the Fed's policy committee next year, said on CNBC television.

The yield on the benchmark 10-year Treasury bond has jumped about 17 percent since Chairman Ben Bernanke said the Fed expected to reduce the pace of its bond-buying program later this year and to halt it altogether by mid-2014, when unemployment is down to around 7 percent.

Bernanke's timeline for the removal of quantitative easing - which was contingent on the economy improving as the Fed expects - sparked selloffs in markets globally and especially in riskier assets such as stocks and corporate bonds.

Kocherlakota added he expects joblessness to fall to 7 percent in the second half of 2014, from 7.6 percent last month.

Repeating comments made on an unusual conference call with reporters on Monday, he said the central bank needs to be clearer about when it plans to raise interest rates, citing that as one reason for the market's abrupt move.

The Fed has said it will raise its overnight federal funds rate only once unemployment drops to 6.5 percent, as long as inflation remains below 2.5 percent. For some time now Kocherlakota has urged his colleagues at the Fed to lower that threshold to 5.5 percent.

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