By Steven K. Beckner

SANTA BARBARA, CALIFORNIA (MNI) – Minneapolis Federal Reserve Bank
President Narayana Kocherlakota said Thursday the Fed cannot afford to
wait too long before it starts tightening monetary policy because of the
lags with which monetary tightening takes effect.

Analogizing making monetary policy to driving a car, he said the
Fed cannot keep its foot on “the accelerator” until it hits the speed
limit, then take its foot off the gas; it has to move “now.”

Kocherlakota, a voting member of the Fed’s policymaking Federal
Open Market Committee, clarified that he meant the Fed must “start to
prepare” to tighten as he answered questions following a speech to the
30th Annual Santa Barbara County Economic Summit.

In his earlier prepared remarks, he said the FOMC should raise the
federal funds rate by 50 basis points toward the end of the year —
provided that his forecast of continued 1.5% core inflation and a
further drop in unemployment to 8.0-8.5% is realized. If not, and
inflation falls, then he said the Fed would need to “ease further.”

Kocherlakota treaded gingerly when asked about the plunging dollar,
echoing Fed Chair Ben Bernanke in saying the best thing the Fed can do
to boost the dollar’s value over time is to meet its “dual mandate” of
price stability and maximum employment.

Kocherlakota said the soaring federal debt needs to be dealt with
in coming years, but for now foreign investors retain confidence in U.S.
Treasury securities.

Asked about potential Fed rate hikes, he said, “What we would like
to have is a car driving along and be able to keep your foot fully on
the accelerator until you hit exactly 60 (miles per hour) or whatever
the speed limit is and take it off.”

“That’s not the car we drive,” he said, referring to monetary

“So that means that even though unemployment is elevated and even
though core inflation is below where we want it to be, we have to start
to move now,” Kocherlakota said. “We have to start withdrawing stimulus

“Now the good news, the appropriate policy news, is that even if we
raise rates slightly at the end of the year we would still have a very
accommodative, very supportive monetary policy stance,” he said.

“But part of the problem we face is we’re not in a car that you can
just take your foot off the accelerator when we hit the speed limit,”
he continued. “We’ve got to start to prepare ahead of time.”

Asked about the dollar’s depreciation, Kocherlakota said “the
dollar is buffeted around by a bunch of different things.”

“The best thing we can do for dollar is to follow policies to
fulfill our mandate,” he said, adding that this will lead to “a strong
and stable dollar.”

Kocherlakota cautioned against retaliating against Chinese currency
policies by imposing higher duties on Chinese exports.

As for the debt, he said “I’m encouraged … by the seriousness of
the dialogue going on about this issue in Washington.” And he said
“markets have a lot of faith in U.S. Treasuries. There is a belief in
the marketplace that there will be an effort to correct this issue.”

“It’s not something that has to be fixed overnight,” he said, but
it has to be done.

In other comments, Kocherlakota said the economic recovery “would
be faster … if construction was able to play more of a role.”

He also said “the high level of energy prices is a drag on consumer
demand and a drag on the recovery.”

He said the energy drag on growth concerns him more than the
transitory impact of energy prices on inflation.

“For energy prices to affect inflation to the same extent (as in
the first quarter) they would have to continue rising 25% per year for
the next four years,” he said.

** Market News International Washington Bureau: 202-371-2121 **