NEW YORK – More accommodation is uncalled for at this point, and the Fed may have to increase rates before 2014, but for now accommodation is appropriate, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota repeated Tuesday.

The decline in household worth as a result of the financial crisis negatively impacted demand and productive capacity, but

“over the past four years, the FOMC’s highly accommodative policy has been successful at keeping demand close to productive capacity, as is evidenced by how close inflation has been to 2 percent. I see no need for additional accommodation at this time, and I believe that conditions will warrant raising rates well before the end of 2014,” he told the Southern Minnesota Initiative Foundation, according to text of prepared remarks released by the Fed.

Also, despite more transparency, Kocherlakota said, “I believe that the Committee would be well served to be more public about how it would react to scenarios that differ from its benchmark.”

The “unemployment rate has improved, and the outlook for inflation has risen since January 2011,” but during that period, he said, “the FOMC actually added more monetary accommodation. I would say that I see no need for still more accommodation at this time. Indeed, as I mentioned earlier, I believe that the FOMC’s recent accommodative steps will lead to both core and headline inflation being above 2 percent in 2013.”

Kocherlakota said he advocates a reduction in accommodation. “From the point of view of the dual mandate, the outlook is better than a year ago—and so we should have less accommodation in place.”

But, he cautioned, “This does not mean that we should be raising rates anytime soon. Last June, the FOMC issued a consensus statement, describing a sequence of steps that it foresaw using to normalize monetary policy. The exit process is a long one, designed to take place over a number of years, and the Committee would likely not raise rates for some time after the exit process begins. I think that the Committee should only begin this exit process if it can be reasonably sure that it won’t have to reverse itself in the near term. I don’t feel that kind of certainty at this stage, and it follows then that it is not yet time to initiate exit, let alone raise rates.”

Changing the Fed’s current forward guidance to the public about the future course of interest rates would be appropriate, he said. “Currently, the FOMC statement reads that the Committee believes that conditions will warrant extraordinarily low interest rates through late 2014. My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012.”

If, however, “the outlook for inflation fell sufficiently and/or the outlook for unemployment rose sufficiently, then I would recommend adding accommodation. There are a number of ways that this could be done. My own preference would be for the FOMC to purchase additional Treasuries or securities issued by Fannie Mae and Freddie Mac in an attempt to drive down longer-term interest rates.”

Kocherlakota advocates “a public contingency plan that discusses its likely policy reactions to an array of scenarios that are viewed as possible in the next year or two. This contingency plan would be beneficial to the economy by reducing the public’s uncertainty about the Committee’s ability and willingness to react to various future contingencies. A public contingency plan would also enhance accountability by forcing the Committee to explain how its choices are linked to the evolution of the economy.”

In general, Kocherlakota said he sees economic conditions “improving over time, but only slowly.”

The recession, especially the drop in households’ net worth and the rise in uncertainty, caused productive capacity to grower slower than expected, a critical factor that isn’t often emphasized, he said. This keeps employment rates lower since new firms aren’t arising. “New firms are a major source of employment growth in the economy,” Kocherlakota said.

“Thus, my view is that the economy has experienced both a reduction in the demand for goods and damage to its productive capacity,” he said. But demand doesn’t seem to be significantly below the productive capacity of the United States.

“To be clear, this observation does not mean that the Fed’s highly accommodative policy was unwarranted,” he said. “Without that policy, I’m sure that output, employment, and prices would all be lower. After all, during the early years of the Great Depression, prices were falling at 10 percent per year. Rather, my point is that the Fed’s highly accommodative policy has kept the demand for goods relatively close to the diminished productive capacity of the economy, and so has kept inflation near 2 percent.”

Kocherlakota believes it will be “at least several more years” before the damage to productive capacity is corrected. He sees 2.5% to 3.0% growth for the next two years, with a slow drop in unemployment to 7.7% by yearend and 7% by the end of 2013.

On inflation, Kocherlakota said “low household net worth and wealth will continue to represent significant headwinds for demand. Hence, I would view a highly accommodative monetary policy as being appropriate. … I expect that the FOMC’s policy will be even more accommodative than I would see as appropriate. Hence, I expect that the core and headline PCE inflation rates will be around 2 percent this year and rise to 2.3 percent in 2013.”

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