By David Bailey
MINNEAPOLIS, Minn. Jan 10 The Federal Reserve's
policy of zero interest rates and asset purchases is
appropriate, perhaps even insufficient, given forecasts for weak
economic growth and low inflation for years to come, a top
central bank official said on Thursday.
The U.S. economy will continue to expand too slowly over the
next two years to bring down unemployment substantially, said
Narayana Kocherlakota, president of the Minneapolis Fed.
"Inflation will run below the Fed's target of 2 percent over
the next two years and the unemployment rate will remain
elevated. This forecast suggests that, if anything, monetary
policy is currently too tight, not too easy," he told a meeting
sponsored by Minneapolis Fed.
Kocherlakota predicts U.S. gross domestic product will
expand at an annual pace of 2.5 percent in 2013 and 3 percent
next year, estimates that put him on the low end of Fed
"This growth will do little in terms of returning the
economy to the historical trend," Kocherlakota said in prepared
remarks to a Minneapolis Fed event. "Consistent with this slow
output growth, I expect unemployment to continue to fall only
The unemployment rate, currently at 7.8 percent, should fall
to around 7.5 percent towards the end of this year and 7 percent
in 2014. This will prevent wages from rising very quickly and
keep inflation at bay.
Kocherlakota sees the Fed's preferred inflation measure
remaining below the central bank's official 2 percent target
over the next two years.
In response to the financial crisis and deep recession of
2007-2009, the Fed bought over $2 trillion in mortgage-backed
securities and Treasury bonds, in an effort to keep long-term
rates down and spur investment.
Kocherlakota said the Fed's expanded balance sheet, now at
$2.9 trillion and over three times its pre-crisis size, does not
raise the threat of future inflation as some analysts even some
Fed officials have maintained.
That's because the central bank, beginning in 2008, was
given the power to pay interest on the reserves banks park at
the Fed. In that manner, he said, the Fed can control the path
of price growth in the economy.
"By doing that we now have the ability to control
inflationary pressures even if we have a very large balance
sheet," he said.