By Yali N’Diaye
WASHINGTON (MNI) – Despite headwinds from household deleveraging
and banks’ asset quality issues, Minneapolis Federal Reserve Bank
President Narayana Kocherlakota Tuesday said he expects U.S. economic
growth to accelerate this year, and inflation to “turn north.”
In prepared remarks to the Wisconsin Bankers Association,
Kocherlakota, a voter on the Federal Open Market Committee this year,
summarized his macroeconomic outlook: “I expect that real output will
grow slightly more rapidly in 2011 than in 2010. Household deleveraging
and bank asset quality will remain a drag on the recovery. Unemployment
will fall-but much more slowly than we would like. Finally, as is
suggested by financial market data, I am optimistic that we will see
some re-inflation in the coming year.”
He did not comment on current monetary policy issues.
While warning against celebrating “too much,” Kocherlakota expects
a Q4’10 year-over-year real GDP growth rate of 2.8%, recovering to its
Q4 2007 level.
And going forward, “My bottom line is that, from the point of view
of the macroeconomy, 2011 will be a better year than 2010,” he said.
Still, 2011 growth is more likely to be closer to 3% than 4%, even
after taking the tax package into account.
“I still see two major headwinds in the U.S. economy,” the central
banker said.
“The first is that many households will continue to strive to
rebuild their net worth positions in response to past-and possibly
future-falls in residential land prices,” he said. This deleveraging
will be a drag on growth.
The second headwind comes from asset quality issues that U.S. banks
continue to face, with Kocherlakota stressing the Federal Deposit
Insurance Corporation’s list of 800 problem banks.
Such banks prefer to dedicate their resources to capital
preservation rather than loan expansion. And “as the economy improves, I
suspect that this headwind will become even more important,”
Kocherlakota said.
Despite his expectations for accelerating growth this year,
Kocherlakota still sees high unemployment for some time, with the
unemployment rate above 9% this year and above 8% at the end of 2012.
“Employment growth remains disappointingly low,” he said, adding
that the December 2010 decline in the unemployment rate had a lot to do
with “unemployed people ceasing to look for work.”
So “I do not believe that either unemployment or employment will
improve rapidly in 2011,” he said.
Against this backdrop, “Inflation remains extraordinarily low.”
“With that said, I’m optimistic that inflation will actually turn
north in 2011,” Kocherlakota said.
The Minneapolis Fed expects that by the end of this year, inflation
will be between 1.5% and 2%.
He stressed, however, that while some argue that lower interest
rates could feed “undesirable inflationary pressures within the
economy,” there is “little” evidence of such pressures looking at “the
recent path of inflation.”
What the Fed’s reduction in interest rates has done, however, is to
lessen “the impact of the net worth shock.”
He defended the Fed’s action during the crisis, arguing that
without increasing the monetary base, “real GDP would have fallen by
even more than 4 percent and unemployment would have been well above 10
percent.”
Yet the Fed did not cause the bubble, he said, adding his views are
“agnostic” as to who or what caused the high real estate prices.
** Market News International Washington Bureau: 202-371-2121 **
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