The Fed should use a 5.5% target for unemployment rather than the 6.5% it set, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday.

Expecting "moderate" growth for the next two year, with inflation below the Fed's 2% target, will lead to unemployment rates above 7%.

"Hence, the FOMC can better promote price stability and promote maximum employment, as mandated by Congress, by adopting a more accommodative policy stance," Kocherlakota told the Financial Planning Association of Minnesota, according to prepared text released by the Fed. "It can provide that extra accommodation by lowering the unemployment rate threshold in its forward guidance to 5.5% from the current setting of 6.5%."

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