‘Muted’ effect if Fed buys more bonds-Kocherlakota

BLOOMINGTON, Minn, Oct 14 (BestGrowthStock) – The U.S. Federal
Reserve Bank may get little bang for its buck if it tries to
help boost the modest economic recovery with a renewed round of
Treasury debt purchases, Minneapolis Fed President Narayana
Kocherlakota said on Thursday.

But Kocherlakota, who has been cool to the idea of further
Fed monetary policy easing because he attributes at least some
of the high U.S. unemployment rate to factors beyond the Fed’s
control, stopped short of joining some of his colleagues,
including Kansas City Fed President Hoenig, in firm opposition.
Instead, he repeated his view that weighing its costs and
benefits is a difficult “calculus.”
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To see where officials stand in debate:

http://link.reuters.com/ryv97p or [ID:nN01107830]

For more stories on Fed policy, see [FED/AHEAD]

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The Fed has kept benchmark U.S. interest rates near zero
since December 2008, and bought $1.7 trillion in
mortgage-backed securities and Treasuries to pull the U.S.
economy out of its worst recession in decades.

But U.S. growth slowed over the summer, and nearly one in
10 in the labor force are unable to find work. Economists see
little chance the lofty unemployment rate will move lower any
time soon, sparking concern that already low inflation could
drop further as households hoard cash.

All 52 economists surveyed by Reuters said they expect the
Fed will move to drive down interest rates further with a new
round of Treasury purchases. The vast majority see the policy
shift coming this quarter.

Kocherlakota repeated his view Thursday that the first
round of so-called quantitative easing, at the height of the
financial crisis, reduced the term premium — the difference in
yields not explained by the expected path of short-term
interest rates — on benchmark 10-year Treasury notes
(US10YT=RR: ) relative to two-year notes (US2YT=RR: ) by about 0.4
to 0.8 percentage point.

“My own guess is that further uses of QE would have a more
muted effect on Treasury term premia” because markets are
functioning much better now than in early 2009, said
Kocherlakota, who will rotate into a voting seat on the Fed’s
policy-making committee next year.

Kocherlakota nodded to two other tools the Fed might also
use: lowering the interest rate paid on banks’ excess reserves,
and strengthening the Fed’s stated commitment to keeping rates
low for an “extended period,” saying they also could be used to
change the expected path of short-term rates.

While calling the unemployment situation “disturbing,”
Kocherlakota said he expects the current modest recovery to
continue, and inflation to tick back up to a more desirable 1.5
to 2 percent in the second half of next year.

That would put inflation close to the “tight range around 2
percent” that Kocherlakota said is seen as defining the Fed’s
price stability mandate. While the Fed’s other mandate is to
support maximum employment, what that means exactly is a much
more fluid target, he said.
(Reporting by Ann Saphir; Editing by James Dalgleish)

‘Muted’ effect if Fed buys more bonds-Kocherlakota