Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis president, said Tuesday that he is troubled by both the 9.5% national unemployment rate and the reasons it exists.

A "mismatch" exists between the skills employers want and those possessed by jobseekers, according to the prepared text of a speech he gave to an audience in Marquette, Mich. The unemployment rate should be close to 6.5%, not 9.5%, with the current job opening rate, he said.

"The job openings rate has risen by about 20% between July 2009 and June 2010," Kocherlakota said. "Under this scenario, we would expect unemployment to fall because people find it easier to get jobs."

Instead, he said the unemployment rate actually has increased. The relationship between the unemployment rate and the job-openings rate began to break down in June 2008, when the national jobless rate was 5.5%, and is now shattered, he said.

"It is hard to see how the Fed can do much to cure this problem," Kocherlakota said. "Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers."

Kocherlakota predicted unemployment would remain above 8% into 2012. He said that in the absence of a solution, good public policy requires the financial impact to idled workers be mitigated by a well-designed unemployment insurance program that provides constant benefits until they find new jobs.

"It should provide incentives only through the level of those benefits, not through their timing," he said, noting that the most recent statement from the Federal Open Market Committee means lending rates will stay low to prevent additional unemployment.

The committee decided to keep the nation's benchmark lending rate — the federal funds target rate — in a range between zero and 25 basis points at its Aug. 10 meeting, after a number of government reports indicated economic growth was slowing.

Speaking of the Fed's balance sheet, Kocherlakota said that its portfolio of mortgage-backed securities has fallen as home-owners have prepaid their mortgages and long-term interest rates have declined. As a result, a larger share of the economy's long-term risk is now in the hands of the private sector, he said.

"This extra risk in private hands could force up the risk premia on long-term bonds and be a drag on the real economy," Kocherlakota said. "The FOMC decided to arrest the decline in its holdings of long-term assets by reinvesting the principal payments from the MBSs into long-term Treasuries."

He said the FOMC decision had a larger than expected impact on financial markets because it led some investors to believe the economic situation was worse than they imagined. In short, that it was based on information not readily available to the general public through economic indicator reports.

"In my view, this reaction is unwarranted," he said. "The FOMC's decisions were largely predicated on publicly available data about real GDP, its various components, unemployment, and inflation."

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