Federal Reserve Bank of Minneapolis President Narayana Kocherlakota trimmed his forecast for U.S. economic growth and raised his outlook for unemployment slightly while calling for a tightening of monetary policy this year.
Unemployment will be “close to 8.5 percent” at year’s end, Kocherlakota said in a speech in Rochester, Minnesota, an estimate contrasting with “between 8 percent and 8.5 percent” in a May 11 speech. Economic growth will be “around 3 percent,” compared with “between 3 percent and 3.5 percent.”
“Given the depth of the recession that we experienced, this rate of growth is disappointing,” Kocherlakota said.
Central bank officials are discussing how quickly to begin tightening policy after completing the purchase of $600 billion in U.S. Treasurys by the end of June. They are also considering a strategy for how to remove stimulus, with a majority favoring ending the policy of reinvesting proceeds from maturing securities first before raising interest rates or selling assets, minutes of their April 26-27 meeting showed last week.
Kocherlakota repeated his call for an increase in the target federal-funds rate by 0.5 percentage point under his forecast, following St. Louis Fed President James Bullard who yesterday said the central bank may need to tighten policy this year. In contrast, New York Fed President William C. Dudley said last week the recovery is trailing the Fed’s goals, and opposed a policy response to a temporary rise in food and energy prices.
“Under my baseline forecast, it would be desirable for the FOMC to raise the fed funds target interest rate by a modest amount toward the end of 2011,” Kocherlakota said.
‘Headwinds’ for Economy
“Headwinds in the U.S. economy” include increased savings by households seeking to restore net worth “in response to past and possibly future falls in residential land prices,” he said. A focus by banks on loan problems rather than on making new loans also inhibits the recovery, he said.
The economy grew at a 1.8 percent pace in the first quarter of 2011, according to Commerce Department data. Growth will pick up to 3.3 percent in the current quarter and 2.7 percent for the year, according to the median of 67 economists surveyed this month by Bloomberg News.
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