Based on his predictions of core personal consumption expenditure inflation rising slowly this year, and remaining under 2%, a “modest” rate hike by the end of the year “would be desirable,” Federal Reserve Bank of Minneapolis president Narayana Kocherlakota reiterated Wednesday.
Should PCE core inflation rise to 1.5%, a hike of 50 basis points would be called for, Kocherlakota told the Rochester Area Chamber of Commerce, according to prepared text released by the Fed that echoed remarks he made two weeks ago in New York.
“Of course, a core inflation rate of 1.5% is still markedly below the Fed’s price stability objective of 2%,” he said. “Accordingly, an increase of 50 basis points in the fed funds rate would still leave the Fed in a highly accommodative stance. First, the fed funds rate would be extremely low — between 50 and 75 basis points. As well, the Fed’s holdings of long-term assets would continue to provide significant accommodation.”
Monetary policy would still be “easy” at that point, just not as easy as it was in 2010, according to Kocherlakota.
“Thus, under my baseline forecast, it would be desirable for the FOMC to raise the fed funds target interest rate by a modest amount toward the end of 2011,” he said.
Kocherlakota noted that his predictions can be off, in which case, if core PCE inflation decline, a further ease would be in order.