UPDATE 1-Fed’s Kocherlakota: US growth slowdown ‘troubling’

(Adds comments to audience, byline)

By William Wilcoxen

ST. PAUL, Minn., Nov 30 (BestGrowthStock) – The Federal Reserve’s
controversial decision this month to buy $600 billion in
Treasury notes came against the backdrop of a “troubling”
slowdown in U.S. economic growth and “too low” inflation and
employment, a top Fed official said on Tuesday.

The U.S. central bank would have liked to lower borrowing
costs by cutting short-term interest rates, but its target rate
for overnight lending between banks is already near zero,
Minneapolis Fed President Narayana Kocherlakota told a
symposium at Hamline University in St. Paul, Minnesota.

Instead, the Fed decided to add longer-term assets to its
balance sheet, a move that should also reduce real interest
rates and “lead to less unemployment and upward pressure on
prices,” he said.

Kocherlakota, who next year rotates into a voting seat on
the Fed’s policy-setting committee, repeated his support for
the move, putting him on the dovish end of the spectrum at the
Fed.

The purchases are unlikely to fuel future inflation, he
said, because the central bank has the tools and the commitment
to keep inflation low.

And while Kocherlakota said some limited increase in
inflation would be a good thing, he downplayed any risks of
strong inflation.

“I don’t think those kind of effects like, ‘Boy, the Fed
has inflated its balance sheet, that’s going to lead to big
changes in inflation,’ I don’t think that linkage is there,” he
told the audience.

Still, he said, the effects of the new policy on the
economy will be “relatively modest.”

Kocherlakota’s speech was nearly identical to those he made
in Chicago two weeks ago, except he then called the slowdown in
U.S. growth “alarming.”

New data shows growth in gross domestic product decelerated
to an average 2.1 percent in the most recent two quarters, from
an average 2.9 percent in the five quarters since the recession
ended. Previous data had shown 2 percent average growth in the
most recent two quarters.

Unemployment, however, remains stubbornly high at 9.6
percent, and inflation for consumer goods has averaged well
below the Fed’s target of about 2 percent.

“Inflation and employment are both too low, and the rate of
improvement in these variables is too slow,” he said.

As he did in his Nov. 18 speech, Kocherlakota outlined a
series of tax policies that in his view could mimic a
one-percentage point cut in short-term interest rates.

Such policies are particularly important to consider when
monetary policy tools are constrained, as they are today, by
near-zero short-term interest rates, he suggested.

For more on Fed policy, please see [FED/AHEAD].
(Reporting by William Wilcoxen, writing by Ann Saphir; Editing
by Leslie Adler)

UPDATE 1-Fed’s Kocherlakota: US growth slowdown ‘troubling’