Fed's Kocherlakota urges no US rate increases this year

[WASHINGTON] The Federal Reserve should leave short-term borrowing costs near zero for a seventh year in a row, a top Fed official urged on Thursday, citing sliding US inflation and still-high unemployment.

The Fed "can best achieve its macroeconomic objectives by not raising the fed funds rate target this year," Minneapolis Fed President Narayana Kocherlakota said in remarks prepared for delivery to a town hall at his bank's headquarters. "Raising the target range for the fed funds rate in 2015 would only further retard the pace of the slow recovery in inflation." The Fed has kept short-term interest rates near zero since December 2008 in order to boost investment, hiring and growth. Unemployment is at 5.8 per cent, down from a recession-era peak of 10 per cent, and economic growth has been fairly strong.

Most Fed policymakers think the central bank should start raising interest rates this year, with many viewing mid-year as an appropriate starting point.

Kocherlakota is only one of two Fed policymakers who want to delay any rate hikes until 2016. He dissented three times last year as the Fed wound down its bond-buying stimulus and signaled rate hikes could come in 2015.

To Kocherlakota, low inflation means the Fed "could have, and should have" added more stimulus to bring down unemployment faster.

Unemployment is still several percentage points above what most Fed officials view as normal.

And inflation, which has lingered well below the Fed's 2-per cent goal for more than 2-1/2 years, slipped further as 2014 came to a close, with bets in financial markets signaling declines in longer-term inflation expectations as well.

Unless the Fed responds, "the public could increasingly perceive the (Fed) as aiming at a lower inflation rate," undermining the effectiveness of its monetary policy, he said.

Kocherlakota does not vote on Fed policy this year, and has announced plans to resign by early next year. But he will take part in policy-setting meetings, the next one of which is scheduled in about three weeks.

REUTERS