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Fed should "ease up on gas" in 2011: Kocherlakota

By Emily Flitter

NEW YORK (Reuters) - Minneapolis Federal Reserve Bank President Narayana Kocherlakota on Wednesday repeated his call for a half-percentage-point interest rate hike by year-end, lending his weight to what still appears to be a minority view at the U.S. central bank.

In remarks that closely tracked a speech he gave last week, the head of the smallest regional Fed bank said he sees core inflation rising by year's end to 1.5 percent, still short of the Fed's informal 2 percent target, but nearly double the rate last year.

If that forecast pans out, "The Fed would then be closer to its price stability mandate - and so should ease the pressure on the monetary gas pedal," he said. "My recommendation in this scenario would be to raise the target fed funds rate by 50 basis points," he told the Forecasters' Club of New York.

Kocherlakota is not the first top Fed official to suggest higher rates might be warranted this year, but he is the first to link a specific recommendation for monetary policy tightening to a specific forecast.

Others, like Philadelphia Fed President Charles Plosser, have said higher rates might be warranted this year, without tying the view to a particular forecast for inflation or unemployment.

Kocherlakota and Plosser are both voting members this year on the Fed's policy-setting panel, along with another inflation "hawk," Dallas Fed President Richard Fisher.

But unlike some other "hawkish" policymakers such as Fisher, Kocherlakota was supportive of the Fed's bond-buying program last year.

Unemployment, which registered 9 percent in April, is set to fall to between 8 and 8.5 percent this year, Kocherlakota said on Wednesday. The improvements in the jobless rate and in inflation make a modest increase in the Fed's target policy rate appropriate, he said.

The increase would still leave the Fed's monetary policy highly accommodative, he said, "just not as easy as late 2010."

Kocherlakota said he prefers to use the Fed's traditional policy lever, targeting the bank-to-bank overnight lending rate known as the fed funds rate, to tighten monetary policy. But he is also open to stopping the Fed's current policy of reinvesting maturing securities into Treasuries, or selling long-term assets outright, he said.

Should inflation rise faster than expected, to 1.8 percent this year, the Fed should raise rates more aggressively, he said. Should it fall relative to 2010, he said, further easing through asset purchases would be desirable.

The Fed has kept rates near zero since December 2008 and is on track to buy a total of $2.3 trillion in long-term securities by June to push borrowing costs still lower.

In late April, Fed Chairman Ben Bernanke said the central bank is in no hurry to tighten monetary policy after the bond-buying is complete, given the modest economic recovery from a deep recession.

(Writing by Ann Saphir; Editing by James Dalgleish)

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