Minneapolis Fed president says interest rates might rise even with high unemployment

The president of the Federal Reserve Bank of Minneapolis defended the Fed's easy money policies but said that inflation could make tightening of those policies necessary.

Narayana Kocherlakota spoke to reporters Thursday at a conference at St. Cloud State University.

Kocherlakota said many economic observers assume that inflation is unlikely with the national unemployment rate so high. But he says it's possible that inflationary pressures could develop even if unemployment rates dip to 8 percent. That could affect what the Fed does with interest rates.

"I think we have to be really careful about watching inflation itself. And making sure that variable is not moving in an untoward way. And that might mean tightening even when unemployment is high by historical standards," he said.

The national jobless rate fell in January to the lowest level in 21 months, dropping to 9 percent from 9.4 percent in December.

Kocherlakota defended the Fed's plan to buy $600 billion in U.S. government bonds by the end of June.

The program aims to drive down interest rates, stimulate growth and lower unemployment. Some Fed officials have argued that recent stronger economic data means the Fed should consider curtailing the program. Kocherlakota said he didn't see a reason for stopping it.

"You never ever say never in this game, but at this stage, it's very hard for me to think of conditions that would qualify."

Kocherlakota said the big question facing the Fed is when to start tightening monetary policy. He says the recovery and inflation must both be stable, even though inflation is low.