UPDATE 2-Fed's Kocherlakota urges Fed adopt collective forecast

* Says collective forecasts would aid public understanding

* Jobless rate trigger for rate hikes could be flexible

(Adds Kocherlakota's flexibility on jobless rate threshold)

By Alister Bull

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

Minneapolis Federal Reserve Bank President NarayanaKocherlakota, who has proposed keeping interest rates low untilthe jobless rate falls to 5.5 percent unless the Fed'smedium-term inflation outlook hits 2.25 percent, said hisproposal required a collective forecast.

The Fed currently provides a quarterly summary of individualpolicymakers' forecasts for growth, inflation, unemployment andthe overnight Fed funds rate, and is debating replacing thiswith 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 toguide the public about when the U.S. central bank will tightenpolicy, and it appears to have gained support among otherpolicymakers.

His plan builds on an earlier proposal from Chicago FedPresident Charles Evans

"My proposed operational definition of price stabilityhinges on the Committee's formulating, and communicating, aquantitative collective outlook," he told an audience ofbusiness and community leaders in Great Falls, Montana, inremarks that largely echoed the speech he delivered on Sept. 20.

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

Kocherlakota added on Wednesday that the unemployment ratethreshold need not be set in stone.

"When the unemployment rate reaches 5.5 percent, the Fedcould take into account a number of other economic conditions atthat point in time to say, 'boy, things have not improved,'" hesaid.

"So we could keep the fed funds rate low even though theunemployment rate has hit 5.5 percent," he said.


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

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

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

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

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

As a result, in September it extended it low-rate pledgeuntil mid-2015. But this calendar-based commitment facesopposition on the 19-member policy-setting committee, and thesuggestions of using numerical jobless and inflation ratethresholds would reduce tension between Fed hawks and doves.

Kocherlakota, who had previously been thought of as anarch-hawk, caught flak from critics who said he was being toodovish -- or insufficiently vigilant on inflation -- by aimingfor 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 stricton inflation. Kocherlakota said his plan fell into neither camp,but rather recognized the Fed's dual goals of high employmentand low inflation.

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

(Additional reporting by Jason Lange; Editing by Andrea Ricci)


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