Fed's Kocherlakota floats overshooting US inflation in future

MINNEAPOLIS Wed May 21, 2014 1:18pm EDT

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MINNEAPOLIS May 21 (Reuters) - U.S. inflation may not climb back to 2 percent until 2018, so the Federal Reserve should consider overshooting that target for a few years afterward to make up for the current period of low prices, a top Fed policymaker said on Wednesday.

Narayana Kocherlakota, president of the Minneapolis Fed, floated the idea of "price level targeting" but did not explicitly endorse it, saying in a speech the idea deserves "serious discussion" at the U.S. central bank.

Under price level targeting, the Fed would let inflation run above its 2-percent goal in the years ahead to make up for the currently low prices for goods in the economy. As it stands, the Fed practices "inflation targeting" in which it aims for the goal at all times irrespective of past trends.

The Fed's preferred gauge of inflation, the personal consumption expenditure or PCE, has averaged 1.5 percent since the start of the recession in 2007. It is now just above 1 percent, which Kocherlakota said signals "wasted resources" in the U.S. economy, especially among workers.

If the central bank were to move to target prices, businesses would be more prone to hire and invest because they would predict more stimulative future monetary policy and higher demand. Such a decision "has the potential to affect the near-term speed of the economy's recovery," Kocherlakota said in prepared remarks to the Economic Club of Minnesota.

A voter on Fed policy this year, Kocherlakota added he expects PCE inflation to run below 2 percent "for several years, possibly until 2018."

The Fed has kept interest rates near zero since late 2008 to promote growth and hiring. In part due to the last couple of years of low inflation, it has also promised to keep rates low for a while to come. (Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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