Fed's Kocherlakota: U.S. growth slowdown "troubling"

By William Wilcoxen
ST. PAUL, Minnesota | Tue Nov 30, 2010 1:49pm EST
ST. PAUL, Minnesota (Reuters) - The Federal Reserve's controversial decision this month to buy $600 billion in Treasury notes came against the backdrop of a "troubling" slowdown in U.S. economic growth and "too low" inflation and employment, a top Fed official said on Tuesday.

The U.S. central bank would have liked to lower borrowing costs by cutting short-term interest rates, but its target rate for overnight lending between banks is already near zero, Minneapolis Fed President Narayana Kocherlakota told a symposium at Hamline University in St. Paul, Minnesota.

Instead, the Fed decided to add longer-term assets to its balance sheet, a move that should also reduce real interest rates and "lead to less unemployment and upward pressure on prices," he said.
Kocherlakota, who next year rotates into a voting seat on the Fed's policy-setting committee, repeated his support for the move, putting him on the dovish end of the spectrum at the Fed.

The purchases are unlikely to fuel future inflation, he said, because the central bank has the tools and the commitment to keep inflation low.
And while Kocherlakota said some limited increase in inflation would be a good thing, he downplayed any risks of strong inflation.

"I don't think those kind of effects like, 'Boy, the Fed has inflated its balance sheet, that's going to lead to big changes in inflation,' I don't think that linkage is there," he told the audience.
Still, he said, the effects of the new policy on the economy will be "relatively modest."
Kocherlakota's speech was nearly identical to those he made in Chicago two weeks ago, except he then called the slowdown in U.S. growth "alarming."

New data shows growth in gross domestic product decelerated to an average 2.1 percent in the most recent two quarters, from an average 2.9 percent in the five quarters since the recession ended. Previous data had shown 2 percent average growth in the most recent two quarters.

Unemployment, however, remains stubbornly high at 9.6 percent, and inflation for consumer goods has averaged well below the Fed's target of about 2 percent.
"Inflation and employment are both too low, and the rate of improvement in these variables is too slow," he said.

As he did in his November 18 speech, Kocherlakota outlined a series of tax policies that in his view could mimic a one-percentage point cut in short-term interest rates.
Such policies are particularly important to consider when monetary policy tools are constrained, as they are today, by near-zero short-term interest rates, he suggested.
(Reporting by William Wilcoxen, writing by Ann Saphir; Editing by Leslie Adler)
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