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Continued bond sales won't risk higher inflation, says head of Minneapolis Fed

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The Federal Reserve can continue to support the economy through bond purchases without risking higher inflation, the head of the Federal Reserve Bank of Minneapolis said Tuesday.

Since the start of the recession, a key inflation marker -- the personal consumption expenditure price index -- has averaged just 1.5 percent. The index offers a broad measure of the prices of goods and services in the economy.

"As long as we continue to see inflation this low or even much higher than this, even getting up to 2 percent or a little bit above, we should stick to this higher level of accommodation," Narayana Kocherlakota, president of the of Minneapolis Fed, told a gathering of the St. Paul Area Chamber of Commerce.

The Federal Reserve sets the nation's monetary policy and tries to keep enough credit in the economy to maximize employment while keeping inflation low. 

The labor market is still very weak and the Fed needs to maintain its policies of buying $85 billion of long-term assets per month to boost employment, Kocherlakota said. 

Interest rates shot up earlier this year when Fed Chairman Ben Bernanke said the job market looked strong enough for the Fed to start unwinding its stimulus program. But the Fed maintained the stimulus plan as the economy continued to limp along. 

Kocherlakota also said the Fed should lower the interest rate it pays to banks on emergency funds in excess of regulatory requirements. Paying banks to keep their money on the sidelines is a disincentive to lending, he added.