Fed's Kocherlakota says growth to accelerate in 2011

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the U.S. economy should grow "slightly more rapidly" in 2011 than last year, even as households rebuild savings and banks focus on preserving capital.

"The recession has had, and will continue to have, a large and persistent impact on the U.S. economy," he said during a speech today in Madison, Wisconsin. While inflation should accelerate from "extraordinarily low" levels, growth will "probably be closer to 3 percent" and unemployment is likely to stay above 8 percent as late as December 2012, he said.

The regional bank chief, who votes on interest rate policy for the first time this year, joined other officials such as Chairman Ben S. Bernanke and Vice Chairman Janet Yellen in defending the Fed's efforts to revive growth, saying he's "very comfortable" with the Fed's plan to buy $600 billion in Treasury securities. Republican lawmakers and officials in China, Germany and Brazil have criticized the program, saying it may weaken the dollar and stoke asset-price bubbles.

"The size of this shock meant that this recession was going to be a painful and challenging one, regardless of the policy response," Kocherlakota said in remarks before the Wisconsin Banker's Association Economic Forecast Luncheon. "Nonetheless, it is clear to me that the recession and its subsequent recovery would have been significantly worse in the absence of the actions of the Federal Reserve."

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Kocherlakota, a former University of Minnesota professor of economics, was named to lead the Minneapolis Fed on September 30, 2009, three months after the official end of the recession in June of that year.

JOB OPENINGS

Labor department data released today show job openings in the U.S. fell in November from the highest level in two years, signaling a sustained labor market recovery will take time to develop. The unemployment rate has remained above 9 percent for 20 straight months.

In addition, confidence among U.S. small businesses dropped in December for the first time in five months, the National Federation of Independent Business said today.

Gross domestic product likely grew at about a 2.8 percent rate last year, and "I expect that real GDP growth will probably be closer to 3 percent than 4 percent in 2011," Kocherlakota said. He said there are "two major headwinds" confronting the U.S.: the declining net worth of households and banks with poor asset quality that "are less likely to take the risk of lending" to small businesses and entrepreneurs.

HIGH UNEMPLOYMENT

Kocherlakota predicted an inflation rate of between 1.5 percent and 2 percent by the end of this year. In response to audience questions after his speech, he said declining inflation rates and high unemployment mean "this is not the time" for the Fed to start withdrawing stimulus.

The central bank has held the target for the federal funds rate near zero for two years, and purchased $1.7 trillion of mortgage debt and Treasuries through March 2010 to pull the U.S. out of the worst recession since the 1930s. On Nov. 3, the Federal Open Market Committee decided to buy $600 billion of Treasuries through June in a policy known as QE2 for a second round of quantitative easing.

The 47-year-old Kocherlakota told the Wall Street Journal in an interview published this week that he does not "contemplate stopping" the Fed's latest round of purchases and sets the bar "pretty high" for a dissenting vote.

Federal Reserve Bank of Philadelphia President Charles Plosser said in a speech today that the central bank may have to reassess its bond-purchase plan and that debate among policy makers strengthens their credibility.