Tags: Fed’s Kocherlakota Economy Likely to Grow Faster in 2011

Fed’s Kocherlakota: Economy Likely to Grow Faster in 2011

Tuesday, 11 Jan 2011 02:58 PM

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. economy will probably grow “slightly more rapidly” in 2011 than last year, even as households rebuild savings and banks focus on preserving capital.

“The recession has had, and will continue to have, a large and persistent impact on the U.S. economy,” he said during a speech today in Madison, Wisconsin. While inflation should accelerate from “extraordinarily low” levels, growth will “probably be closer to 3 percent” and unemployment is likely to stay above 8 percent as late as December 2012, he said.

The regional bank chief, who votes on policy for the first time this year, also joined other officials such as Chairman Ben S. Bernanke and Vice Chairman Janet Yellen in defending the Fed’s efforts to revive growth. Republican lawmakers and officials in China, Germany and Brazil have criticized the Fed’s $600 billion bond-purchase program announced in November, saying it may weaken the dollar and stoke asset-price bubbles.

“The size of this shock meant that this recession was going to be a painful and challenging one, regardless of the policy response,” Kocherlakota said in remarks prepared for the Wisconsin Banker’s Association Economic Forecast Luncheon. “Nonetheless, it is clear to me that the recession and its subsequent recovery would have been significantly worse in the absence of the actions of the Federal Reserve.”

Labor department data released today shows job openings in the U.S. fell in November from the highest level in two years, signaling a sustained labor market recovery will take time to develop. The unemployment rate has remained above 9 percent for 20 straight months.

Confidence Dropped

In addition, confidence among U.S. small businesses dropped in December for the first time in five months, the National Federation of Independent Business said today.

Gross domestic product likely grew at about a 2.8 percent rate last year, and “I expect that real GDP growth will probably be closer to 3 percent than 4 percent in 2011,” Kocherlakota said. “Two major headwinds” continuing to face the U.S. are the declining net worth of households and banks with poor asset quality that “are less likely to take the risk of lending” to small businesses and entrepreneurs.

Kocherlakota predicted an inflation rate of between 1.5 percent and 2 percent by the end of this year.

The central bank has held the target for the federal funds rate near zero for two years, and purchased $1.7 trillion of mortgage debt and Treasurys through March 2010 to pull the U.S. out of the worst recession since the 1930s. On Nov. 3, the Federal Open Market Committee decided to buy $600 billion of Treasurys through June in a policy known as QE2 for a second round of quantitative easing.

‘Pretty High’

The 47-year-old Kocherlakota has led the Minneapolis Fed since October 2009 and is former chairman of the economics department at the University of Minnesota. He told the Wall Street Journal in an interview published this week that he does not “contemplate stopping” the Fed’s latest round of purchases and sets the bar “pretty high” for a dissenting vote.

Federal Reserve Bank of Philadelphia President Charles Plosser said in a speech today that the central bank may have to reassess its bond-purchase plan and that debate among policy makers strengthens their credibility.

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Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. economy will probably grow slightly more rapidly in 2011 than last year, even as households rebuild savings and banks focus on preserving capital. The recession has had, and will continue to...
Fed’s Kocherlakota Economy Likely to Grow Faster in 2011
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Tuesday, 11 Jan 2011 02:58 PM
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