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UPDATE 1-Fed's Kocherlakota urges Fed adopt collective forecast

Wednesday, 10 Oct 2012 | 4:09 PM ET

* Fed should adopt collective forecasts-Kocherlakota

* Aims for 5.5 pct jobless, 2.25 pct inflation thresholds

(Updates with more Kocherlakota comments, background)

By Alister Bull

WASHINGTON, Oct 10 (Reuters) - The Federal Reserve should adopt a collective economic forecast to help the public understand its thinking better, a senior official at the U.S. central bank said on Wednesday, pointing to a likely next step in the Fed's evolving communication strategy.

Minneapolis Federal Reserve Bank President Narayana Kocherlakota, who proposed last month that the Fed hold interest rates near to zero until U.S. unemployment was back under 5.5 percent, also said his proposal required a collective forecast.

The Fed currently provides a quarterly summary of individual policymakers' forecasts for growth, inflation, unemployment and the overnight Fed funds rate, and is debating replacing this with a consensus-based, collective quarterly report.

Kocherlakota's proposal on the timing of the Fed's 'lift-off' for raising rates is part of a broader effort to guide the public about when the U.S. central bank will tighten policy, and it appears to have gained support among other policymakers.

His suggestion, which builds on an earlier proposal from Chicago Fed President Charles Evans, is contingent upon keeping U.S. inflation below 2.25 percent.

"My proposed operational definition of price stability hinges on the Committee's formulating, and communicating, a quantitative collective outlook," he told an audience of business and community leaders in Great Falls, Montana, in remarks that largely echoed the speech he delivered on Sept. 20.

That speech announced his definition of his preferred thresholds. Subsequent minutes of the Fed's September 12-13 policy meeting, released last week, further spelled out that "many participants" thought that naming a numerical threshold for the labor market and inflation indicators was a good idea.

NEXT UP, OCTOBER MEETING

Policymakers in September also reviewed exercises on how to shift to a collective Fed forecast and decided to discuss it further at their upcoming meeting, on Oct. 23-24. Kocherlakota said he thought it would help.

"Regardless of what one thinks of the lift-off plan... monetary policy would be clearer and more accountable if the Committee followed the practice of other central banks and reported this kind of quantitative collective medium-term outlook for inflation at least quarterly," he said.

The big Fed news in September was that it decided to buy $40 billion mortgage-backed bonds each month until it saw a substantial improvement in the labor market outlook, undertaking a third round of so-called quantitative easing to spur U.S. growth.

As well as holding rates near zero since late 2008, the Fed had already purchased $2.3 trillion of government and mortgage-backed bonds in an effort to drive down long-term borrowing costs to encourage more U.S. spending.

In order to ensure that the full benefits of this aggressive action is felt on Main Street, Fed officials have tried to come up with language that further emphasizes that ultra-low rates will stay in place even as growth perks up.

As a result, in September it extended it low-rate pledge until mid-2015. But this calendar-based commitment faces opposition on the 19-member policy-setting committee, and the suggestions of using numerical jobless and inflation rate thresholds would reduce tension between Fed hawks and doves.

Kocherlakota, who had previously been thought as an arch-hawk, caught flak from critics who said he was being too dovish -- or insufficiently vigilant on inflation -- by aiming for 5.5 percent unemployment when it is currently 7.8 percent, and could take a number of years to reach the lower threshold.

He was also slammed for picking 2.25 percent as an inflation

ceiling, which others thought was still too hawkish, or strict on inflation. Kocherlakota said his plan fell into neither camp, but rather recognized the Fed's dual goals of high employment and low inflation.

"The plan is neither hawkish nor dovish. The terms "hawkish" and "dovish" presume that the Committee faces a tension between its two mandates. But the Committee does not see any tension between its two mandates now," he said.

(Editing by Andrea Ricci)

((alister.bull@thomsonreuters.com)(+1-202-898-8392)(Reuters

Messaging: alister.bull.thomsonreuters.com@reuters.net))

Keywords: USA FED/KOCHERLAKOTA