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Kocherlakota, in strong Fed rebuke, says FOMC taking 'unacceptable' inflation risks

Kocherlakota's reasons for dissent

The Federal Reserve is taking "unacceptable" inflation risks, raising the specter of Japanese-style deflation, Minneapolis Fed President Narayana Kocherlakota said Friday.

Kocherlakota, who dissented from Wednesday's Fed statement, said the central bank's communicated intent to gradually raise rates "creates an unacceptable downside risk to inflation and inflation expectations."

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The central banker pulled no punches in assessing what he sees as the danger in the Fed's policy.

"In my assessment, the FOMC's failure to respond to weak inflation runs the risk of creating a harmful downward slide in inflation and longer-term inflation expectations of the kind that we have seen in Japan and Europe," he said in a statement explaining his dissent.

He cited three factors for his decision: inflation having run below the Fed's target for more than 30 months; a projection that it will remain below target for the next few years; and a lack of confidence in the stability of longer-term inflation rates.

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Kocherlakota said the Fed should have announced it will keep its rate targets unchanged as long as the near-term inflation outlook stays below 2 percent. In both October and November, he said it would be "inappropriate" to raise interest rates next year, as most expect will happen.

He also said the Fed should make clear it would be willing to renew quantitative easing, or QE, to bring inflation back to targeted levels.

Last week the Minneapolis Fed said Kocherlakota would step down when his term ends in early 2016. His successor will be an alternate member of the Federal Open Market Committee that year.

—Reporting by CNBC's Steve Liesman