–Expects More Accommodation, Making MonPol Inappropriately Easy

By Denny Gulino

WASHINGTON (MNI) – Fear of another crisis like 2008 is a headwind
that is adding years to recovery but monetary policy will still have to
adjust to what improvement occurs, even to the extent of raising rates
late this year, Minneapolis Federal Reserve Bank President Naryana
Kocherlakota said Tuesday.

In remarks prepared for delivery in a dairy in Nicollet, Minnesota,
Kocherlakota underlined his own outlook, that the current level of
accommodation will become increasingly inappropriate soon.

He also repeated that should more accommodation become necessary,
he would support buying more Treasuries and Fannie Mae and Freddie Mac

“I expect that the FOMC’s policy will be even more accommodative
than I would see as appropriate,” he said. “I expect that the core and
headline personal consumption expenditure inflation rates will be around
2 percent his year and rise to 2.3% in 2013.”

For now, “Low household net worth and wealth will continue to
represent significant headwinds for demand,” and so “I would view a
highly accommodative monetary policy as being appropriate.”

Kocherlakota will be on the FOMC in 2014. His appearance in
Nicollet, a community of about 1,000, is part of a “two-way
communication between the residents of Main Street and the Federal
Reserve,” he said.

Although the economy has been improving at a moderate pace, he
said, the crisis cost it trillions of dollars in wealth, years worth of
growth and a productive capacity much depressed from where it would be
otherwise. “Real output has recovered to 2007 levels, but remains well
below what one would expect it to be in light of historical growth

Employment is still “well below 2007 levels” and restraining the
kind of progress that would help the economy catch up faster is that,
“Households and firms now feel that they must stay prepared for the kind
of financial market shock they experienced in 2008.”

“Existing firms’ fear of a 2008 financial market shock keeps them
from hiring workers whom they might have to fire if 2008 recurred,” he

The fear makes it “harder for destroyed jobs to be replaced by
created jobs,” he said.

The fact that inflation is “remarkably close” to the Fed’s target
and not much less — or even lapsed into the kind of deflation that
occurred in the Great Depression — suggests demand for goods is not
“significantly below the productive capacity of the United States.”

It has been the Fed’s highly accommodative policy that has
prevented deflation even considering the “fall in demand and damage to
the productive capacity of the country,” he said. At around 2.5% to 3%
growth in each of the next two years, “output will remain well below
what we might have expected it to be back in 2007.”

The rate of employment growth will be similarly slowed, “to be only
slightly higher than the rate of population growth, he said. “I expect
that the unemployment rate will continue to rall slowly, to around 7.7
percent at the end of this year and to around 7 percent by the end of

Answering his own question whether the FOMC should reduce
accommodation, Kocherlakota said, “Yes. From the point of view of the
dual mandate, the outlook is better than a year ago — and so we should
have less accommodation in place.”

While that doesn’t mean “we should be raising rates anytime soon,”
he went on to repeat that, “My own belief is that we will need to
initiate our somewhat lengthy exit strategy sometime in the next six to
nine months or so, and that conditions will warrant raising rates
sometime in 2013 or, possibly, late 2012.”

“I see no need for additional accommodation at this time, and I
believe that conditions will warrant raising rates well before the end
of 2014,” he reiterated.

** MNI Washington Bureau **