–Might Have to Tighten More Than 50 bps

WASHINGTON (MNI) – The Federal Reserve may have to raise rates by
the end of this year, possibly by more than 50 basis points, if growth
hits 3% and underlying inflation rises, Minneapolis Federal Reserve Bank
Narayana Kocherlakota said Thursday the Wall Street Journal reported.

If economic conditions progress as he expects, the Fed will end the
$600 billion asset purchase program in June as planned, he said.

He said he expects core inflation to rise to about 1.3% by year
end, so raising the Federal funds rates by more than half a point late
this year is “certainly possible.”

He noted in the interview that the often-cited Taylor Rule would in
that circumstance call for a 75 bps rate increase.

“If you consider monetary policy was appropriate at the end of 2010
… and then you see core inflation go up by 50 basis points over the
course of 2011 … the usual response that we know from 20 years of
thinking about monetary policy (or even more) is to raise the target
rate by even more than that increase in observed inflation,” he said,
according to the report. “So that means you should be raising the target
rate by more than 50 basis points.”

Kocherlakota also said that the Fed’s second-round of quantitative
easing, was more potent than he anticipated and had raised near-term
inflation expectations by more than he expected.

When the time comes to tighten monetary policy, he said he favors
raising short-term interest rates over selling assets by the Fed’s
portfolio, primarily because the Fed has a firmer understanding of how
interest rates affect the economy.

Kocherlakota also said he expects the effect of recent global
shocks, such as the crises in Japan and the Middle East, on the U.S.
economy as “relatively small.”

“There’s a more psychological channel of how these uncertainties
impact financial markets,” he said, citing the European debt worries
last year, but didn’t appear too concerned.

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

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