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Fed should not raise rates until late 2016: Kocherlakota

Published 04/07/2015, 10:47 AM
Updated 04/07/2015, 10:47 AM
© Reuters. Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, speaks at the ninth annual Carroll School of Management Finance Conference at Boston College in Chestnut Hill

By Ann Saphir

BISMARCK, N.D. (Reuters) - Minneapolis Fed President Narayana Kocherlakota on Tuesday laid out a case for waiting until the second half of 2016 to start raising interest rates, and to then raise them gradually to just 2 percent by the end of 2017.

It was the first time the dovish policymaker detailed his preferred path for "late and slow" rate hikes. His remarks afterwards to reporters suggest he is increasingly worried that market expectations for nearer-term rate rises, fueled by comments from many of Kocherlakota's Fed colleagues, could knock the wind out of the economic recovery.

"That conversation (about raising rates) in and of itself is a tightening of policy," Kocherlakota said. "I do worry about the ongoing conversation about tightening monetary policy being a drag on economic performance both in terms of growth and in terms of employment outcomes."

Most Fed policymakers, including Fed Chair Janet Yellen, believe the Fed will need to start raising rates this year as the labor market improves and begins to put upward pressure on excessively low inflation. The U.S. central bank has kept rates near zero since December 2008.

Some of the Fed's more hawkish policymakers have even pressed for a rate rise as early as June, warning that waiting too long could force the Fed to hike borrowing costs sharply to head off a potential surge in unwanted inflation.

"I continue to believe that it would be a mistake to raise the target range for the fed funds rate in 2015," Kocherlakota told the Bismarck-Mandan Chamber of Commerce. Because of still-low employment and excessively low inflation, he said, the Fed should "start late and raise (rates) more slowly than we did in 2004 to 2006," the last time the Fed boosted rates.

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The Fed will eventually increase short-term borrowing costs to 3 percent or 3.25 percent, but not until at least 2018, he said. Most Fed officials see the rate near that level by the end of 2017.

A surge in job growth last year has helped push the U.S. unemployment rate down to 5.5 percent, even as inflation has lagged below the Fed's 2-percent target for years.

But the U.S. economy would need at least three more years of labor market improvement like last year to reach the "normal" level seen before the financial crisis, Kocherlakota said.

Inflation, he added, likely will not rise back to the Fed's 2-percent goal until 2018.

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