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Fed's Kocherlakota Renews Call to Hold Rates Lower Longer

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A senior Federal Reserve policymaker on Monday renewed his call for the central bank to hold interest rates near zero until the jobless rate hits 5.5 percent, saying this could help hold down long-term borrowing costs and give the economy needed stimulus.

Minneapolis Federal Reserve Bank President Narayana Kocherlakota, in a rare statement responding to last week's news conference by Fed Chairman Ben Bernanke, said the central bank has not said enough about how policy will play out once the U.S. economic recovery is more advanced.

In addition to renewing his proposal on overnight interest rates, Kocherlakota sketched out a threshold to end bond buying that was in keeping with a plan Bernanke laid out last week.

"The [Fed's policy-setting] committee can reduce residual policy uncertainty, and so better achieve its goals, by providing this missing clarity in future communications," Kocherlakota said.

Global stock prices have plunged and bond yields have shot higher since Bernanke surprised markets last week by stating that the Fed expected to start to reduce the pace of bond buying later this year from a current $85 billion monthly pace.

Since then, financial markets have pulled forward the date when they expect the Fed to start raising interest rates from near zero to around September 2014, even though a majority of Fed policymakers do not expect a liftoff in rates until 2015.

(Read More: Bernanke Bond Announcement Was Poorly Timed: Fed's Bullard)

Kocherlakota, who is not a voter this year on the Fed's policy-setting committee, laid out two key recommendations.

He said the Fed should keep buying bonds until the U.S. jobless rate has fallen under 7.0 percent, provided the outlook for inflation remains below 2.5 percent. The U.S. jobless rate in May was 7.6 percent.

He also repeated his view that the Fed should hold rates near zero until the unemployment rate heads under 5.5 percent.

The Fed has currently committed to keeping rates on hold at least until unemployment hits 6.5 percent. Kocherlakota said he expected it would take two years for the jobless rate to decline from 6.5 percent to 5.5 percent.

"This additional clarity about future policy actions will tend to push downward on a variety of market interest rates and provide needed current stimulus to the economy," he said.

By Reuters.

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