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Fed is creating risks to itself on credibility: Kocherlakota

[ST PAUL] The Federal Reserve is risking its credibility by not acting aggressively enough to bring inflation back up to its 2 per cent target quickly, a top US central banker said on Tuesday. "I think we are creating risks for ourselves on the credibility front," Minneapolis Federal Reserve President Narayana Kocherlakota told reporters after a talk to the St. Paul Rotary Club. "If inflation continues to be persistent below 2 per cent, people's beliefs that it will get back to 2 per cent will start to erode, so then their belief about what our target is for inflation will start to slide downwards." There is already some slippage in market expectations and in the expectations of economists, he said.

Kocherlakota, the only Fed policymaker to dissent on the Fed's decision last month to end its bond-buying stimulus, repeated his view that inflation won't rise back to 2 per cent until 2018. "I wish we were in a position where I didn't have to say that," he said. "I am merely reporting the facts. I wish I was in a position to be reporting different facts." Most Fed officials believe that by next year the economy will be strong enough for the central bank to start raising rates from the near-zero levels they have been at for nearly six years.

Kocherlakota disagrees, saying that a rate hike next year would be inappropriate unless inflation shows signs of heading back to 2 per cent within a year or two.

Although a rise in core inflation or in wages could prompt him to back a 2015 rate hike like his colleagues, he said such a turnaround in inflation is "not very likely," given its track record.

The Fed's preferred gauge of inflation has averaged about 1.5 per cent in recent years.