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Minneapolis Fed Chief Kocherlakota: US May Need to Hike Rates This Year

By    |   Wednesday, 09 May 2012 01:56 PM

Recent improvements in the U.S. economy should mean the Federal Reserve's next policy move will be to raise interest rates, possibly by the end of the year, Narayana Kocherlakota, president of the Minneapolis Fed, said on Wednesday.

“It’s an appropriate time to start thinking about when to begin the process of reversing the level of accommodation,” Kocherlakota said in response to audience questions after a speech in Minneapolis. “Six to nine months down the road, we should be thinking about initiating our exit strategy.”

Kocherlakota’s view contrasts with the plans of the Federal Open Market Committee, which reiterated on April 25 that the Fed will probably need to keep its main interest rate near zero through at least late 2014.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Unemployment is declining and inflation has picked up, two conditions that call for less monetary stimulus, the Minneapolis Fed chief said.

“I don’t see a need for additional accommodation,” said Kocherlakota, who doesn’t vote on policy this year. Still, if economic “shocks” push up unemployment or slow inflation, “it would be very natural for us to be buying additional mortgage-backed securities,” he said.

Fed officials last met April 24-25, where they upgraded their forecasts for growth, unemployment and inflation for the year. The FOMC also said the recovery will pick up gradually even as “significant downside risks” remain in global financial markets.

Political Impasse

Reports since then have pointed to a less optimistic outlook. Employers added 115,000 positions in April, the fewest in six months, Labor Department data showed May 4. Spanish default risk has also climbed to a record with Greece’s political impasse after its election, prompting concerns that the European debt crisis may further weigh on global growth.

Pacific Investment Management Co.’s Bill Gross said on Twitter that a third round of quantitative easing is “getting closer.” Jan Hatzius, chief economist at Goldman Sachs Group Inc., has also said that the Fed will announce more stimulus in June.

The Standard & Poor’s 500 Index fell 0.5 percent to 1,357.35 at 11:27 a.m. in New York, while the yield on the 10- year Treasury fell two basis points to 1.82 percent.

Kocherlakota said in his speech that the central bank should open up policy making more to public view by detailing how it would respond to a range of changes to the economy.

“While I think that we should all take great pride in the recent improvements in FOMC communication, there is still more that can be done,” he said.

“Communication, while always important, is especially so today” with the Fed’s main interest rate at a record low.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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