Fed's Kocherlakotas says inflation low, growth alarmingly slow

U.S. economic growth is slowing and inflation is falling, two worrying trends that warrant the new round of monetary easing by the central bank, said Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.

Inflation of about 1 percent is "low" and, "more troublingly, the inflation rate is drifting downward," Kocherlakota said today in a speech in Sioux Falls, S.D.. "Growth has been low in this recovery compared with most. More alarmingly, growth has been decelerating."

Kocherlakota reiterated his support of the Fed's Nov. 3 move to buy an additional $600 billion of Treasuries through June, while describing the likely impact as "modest." Fed Chairman Ben S. Bernanke is trying to boost growth after near- zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing down joblessness that's close to a 26-year high.

U.S. real gross domestic product, which is adjusted for inflation, grew at a 2 percent annual pace in the third quarter, down from 5 percent at the end of 2009. The economy will probably grow at a 2.2 percent rate in the fourth quarter, according to the median forecast of 57 economists surveyed this month by Bloomberg News.

The Fed's preferred gauge for consumer prices, which excludes food and energy, rose 1.2 percent in September from a year earlier, the slowest pace since 2001.

Boosting Prices

The easing will work though lowering long-term interest rates, boosting asset prices and consumer spending, Kocherlakota said in remarks prepared for an address to the Sioux Falls Rotary. The Minneapolis Fed president votes on policy in 2011 as part of the rotation among Fed presidents.

"Stock prices and house prices rise because those assets become relatively more attractive as investments," he said. "Households with these assets become wealthier and demand more consumption. All of these effects should lead to less unemployment and upward pressure on prices."

Kocherlakota also defended the Fed's controversial plan to buy Treasuries.

A group of 23 people including former Republican government officials and economists published a letter to Bernanke urging him to halt the expansion of monetary stimulus because it risks an inflation surge.

Separately, John Boehner, nominated to be the next House speaker, and three other Republicans leaders last week sent Bernanke a letter expressing "deep concerns" about a policy they said risked weakening the dollar and fueling asset bubbles.

"I believe that these concerns are misplaced for two reasons," the Minneapolis Fed chief said. "First, the Fed has several tools with which to combat incipient inflationary pressures.

"Second, in recent public statements, Chairman Ben Bernanke has explicitly and firmly committed the FOMC to maintaining low inflation," he said.

While supporting the policy, Kocherlakota echoed the view of Dallas Fed President Richard Fisher that regulatory issues outside the scope of monetary policy may be weighing on the labor market. Rising federal spending, a growing federal debt and health-care reform raise issues for businesses, he said.

"Overall uncertainty is a large drag on the economic recovery," he said. "Investors and savers need a lot more clarity" about federal policies. "Absent such clarity, the economic recovery will be slower than it otherwise would be."

Kocherlakota said it may be several years before long-term unemployment, now at a postwar record, reverts to a more normal rate.

The U.S. added 151,000 jobs last month as employment gained for the first time in five months, while the jobless rate held steady. The unemployment rate may average 9.3 percent in 2011, according to the median forecast of 52 economists surveyed this month by Bloomberg News.

Fed policy makers have a long-run goal of 1.7 percent to 2 percent inflation they see as consistent with achieving legislative mandates for maximum employment and stable prices.