Fed's Kocherlakota sees slow U.S. recovery

16. February. 2010

ST. PAUL, Minnesota - The U.S. economy will likely grow at a pace of close to 3 percent over the next two years, slower than many private-sector economists forecast, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said on Tuesday.

While a recovery from the worst downturn since the 1930s is underway, the outlook is clouded by regulatory uncertainty and a still-weak banking sector, Kocherlakota said in the prepared text of his first public speech since his appointment to the top job at the regional Fed bank last September.

"I do think that the economy is on the mend and should continue to recover over the next two years -- in terms of both GDP and unemployment -- but at slower rates than we would like," Kocherlakota told a group of bankers in St. Paul, Minnesota.

Unemployment is unlikely to fall below 9 percent this year or 8 percent next year, he said.

"To get a true expansion in employment and in the economy, the hiring rate has to pick up -- and we have yet to see evidence that it will do so in the immediate future," he said.

On a more positive note, he said, the Fed has kept inflation "at levels consistent with good long-run economic performance," he said.

"The news is mostly good on the inflation front, although the need for careful policy choices is even more critical than usual," Kocherlakota said.

The Fed lowered its target for overnight lending between banks to near zero in December 2008 to help stave off the worst U.S. economic downturn since the 1930s, and it has vowed to keep rates at rock bottom for an "extended period" to nurture a nascent recovery.

But at the last policy-setting meeting Kansas City Fed President Thomas Hoenig's dissented against the phrase "extended period", which has investors watching closely for any signs that the committee is inching closer to removing the phrase. The removal of that phrase would be a step toward tighter monetary policy.

Kocherlakota will rotate into a voting spot on the Fed's monetary policy-setting Federal Open Market Committee next year.

Despite relatively tame inflation, the Fed must be watchful, Kocherlakota said.

Excess reserves at deposit institutions mean there is the potential for inflation should inflationary expectations increase, he said.

But, he added, for that to happen, "we would need a combination of bad monetary policy and poor fiscal management." That combination, he said, is not likely.

"Nonetheless, good policy requires good choices, and policymakers at the Federal Reserve and in Congress need to keep this scenario in mind when making their decisions," he said.
[Reuters]