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Fed Has to Be Clearer on Interest Rates: Fed President

Wednesday, 26 Jun 2013 | 8:09 AM ET
Kocherlakota: Fed Needs to Be Clearer on Policy
Wednesday, 26 Jun 2013 | 8:03 AM ET
In a wide-ranging interview, Narayana Kocherlakota, Federal Reserve Bank of Minneapolis president talks with CNBC's Steve Liesman about keeping the Federal funds rate low until unemployment falls below 6.5%.

The spike in U.S. bond yields and the swings in stocks in reaction to the Federal Reserve's taper talk have been "outsized" versus the central bank's intentions, Minneapolis Fed President Narayana Kocherlakota told CNBC on Wednesday.

The Fed needs to be clearer on the future of the federal funds rate—the overnight leading interest rate that banks charge each other—not just on when the central bank might start to taper its $85-billion-a-month bond-buying program, known as quantitative easing, Kocherlakota said in a "Squawk Box" interview.

The market volatility really comes from questions on when short-term interest rates might go higher, he added, saying: "There continues to be a great deal of uncertainty about what the Fed is going to do with the fed funds rate, our main policy instrument, as the economy recovers more."

The Fed did repeat last week that it would not raise rates until unemployment falls to 6.5 percent or lower, provided the outlook for inflation stays under 2.5 percent.

"We sort of take for granted that people understand that we're going to be in the business of [rate] accommodation for long after asset purchases end," he said. "We're in the business of accommodation as the economic recovery strengthens."

(Read More: US First-Quarter GDP Gets a Haircut, Rises Just 1.8%)

(Read More: Why the Fed Might Hike Rates Sooner Than You Think)

Kocherlakota—who's not a voting member of the Fed's policy-making panel this year—said that early reactions to last week's comments from Fed Chairman Ben Bernanke on possible tapering later this year have been more than he had expected. "The real challenge here is that so much of the conversation is about the flow of [asset] purchases and when the purchases will be reduced."

"We should not be talking about dates at all," the Minneapolis Fed president suggested, "but rather on ... conditions. I would have a threshold, just like we have for the fed funds rate ... for asset purchases."

"Make the communication as data-dependent as possible," he stressed, adding "that threshold would be ... [to] continue to buying assets at least until the unemployment falls below 7 percent," a level he expects to be achieved "sometime in the second half of 2014, not hitting 6.5 [percent] then until 2015."

While inflation hasn't really been an issue, Kocherlakota said he sees "the low levels as transitory," predicting that "inflation will come back up."

By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.

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