UPDATE 1-Fed’s Kocherlakota sees slow U.S. recovery

(Adds more details from Kocherlakota’s speech)

By Ann Saphir

ST. PAUL, Minn., Feb 16 (BestGrowthStock) – The U.S. economy will
likely grow at a pace of close to 3 percent over the next two
years, slower than many private-sector economists forecast,
Federal Reserve Bank of Minneapolis President Narayana
Kocherlakota said on Tuesday.

While a recovery from the worst downturn since the 1930s is
underway, the outlook is clouded by regulatory uncertainty and
a still-weak banking sector, Kocherlakota said in the prepared
text of his first public speech since his appointment to the
top job at the regional Fed bank last September.

“I do think that the economy is on the mend and should
continue to recover over the next two years — in terms of both
GDP and unemployment — but at slower rates than we would
like,” Kocherlakota told a group of bankers in St. Paul,

Unemployment is unlikely to fall below 9 percent this year
or 8 percent next year, he said.

“To get a true expansion in employment and in the economy,
the hiring rate has to pick up — and we have yet to see
evidence that it will do so in the immediate future,” he said.

On a more positive note, he said, the Fed has kept
inflation “at levels consistent with good long-run economic
performance,” he said.

“The news is mostly good on the inflation front, although
the need for careful policy choices is even more critical than
usual,” Kocherlakota said.

The Fed lowered its target for overnight lending between
banks to near zero in December 2008 to help stave off the worst
U.S. economic downturn since the 1930s, and it has vowed to
keep rates at rock bottom for an “extended period” to nurture a
nascent recovery.

But at the last policy-setting meeting Kansas City Fed
President Thomas Hoenig’s dissented against the phrase
“extended period”, which has investors watching closely for any
signs that the committee is inching closer to removing the
phrase. The removal of that phrase would be a step toward
tighter monetary policy.

Kocherlakota will rotate into a voting spot on the Fed’s
monetary policy-setting Federal Open Market Committee next

Despite relatively tame inflation, the Fed must be
watchful, Kocherlakota said.

Excess reserves at deposit institutions mean there is the
potential for inflation should inflationary expectations
increase, he said.

But, he added, for that to happen, “we would need a
combination of bad monetary policy and poor fiscal management.”
That combination, he said, is not likely.

“Nonetheless, good policy requires good choices, and
policymakers at the Federal Reserve and in Congress need to
keep this scenario in mind when making their decisions,” he

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(Editing by Chizu Nomiyama)

UPDATE 1-Fed’s Kocherlakota sees slow U.S. recovery