Next Fed Chair Must Resist Calls to Trim Stimulus -Kocherlakota

Friday, 27 September 2013 02:30 PM

By Ann Saphir

MINNEAPOLIS, Sept 27 (Reuters) - The next chair of U.S. Federal Reserve will need to resist the temptation to wind down the central bank's monetary stimulus in the face of rising criticism of the super-easy policies, a top Fed official said on Friday.

"The main job is going to be to keep accommodation in place for the next few years, even though there is going to be lots of hue and cry to stop providing that accommodation," Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, said in an interview with Reuters.

"We already hear that hue and cry. That person is going to have to lead the committee to be strong against those kinds of criticisms."

Ben Bernanke's term as Fed chairman ends in January, and Vice Chair Janet Yellen has been tipped as his likely successor.

In past speeches and papers, Yellen has been a big proponent of keeping Fed policies very easy in order to bring down high unemployment more quickly, even at the cost of a little inflation.

Other Fed officials have been less supportive, with some warning that continuing to buy bonds at the current rate of $85 billion a month and keeping short-term interest rates near zero could spark future inflation or lead to asset bubbles.

Kocherlakota says the risks of continued stimulus are small.

Any increase in inflation due to the Fed's continued super-easy policies is likely to be temporary, and he said the Fed can act quickly should inflation threaten to rise too far above the central bank's 2 percent target.

The Fed's good track record in forecasting inflation over the past 15 years makes Kocherlakota confident that the central bank will see any signs of the economy overheating from too much stimulus long before the situation gets out of hand.

"If our inflation outlook rises to 2.25 percent, or 2.5 percent as the committee has said, I think we can still pull back from the brink even if inflation were to get that high," he said. The Fed's policy-setting committee has said it will keep rates low to bring down unemployment as long as inflation does not threaten to breach 2.5 percent.

As for asset bubbles, Kocherlakota downplayed the role that concern of bursting bubbles should play in monetary policy-making.

If the Fed does see an asset bubble in the making, he said, it's unclear whether the Fed should raise rates as a deterrent to a bubble, or cut rates to head off the shock from an asset price collapse.

In the face of that uncertainty, he said, the Fed should shape monetary policy to address its dual mandate set by Congress: keeping prices stable, and maximizing employment.

(Reporting by Ann Saphir; Editing by Leslie Adler)

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