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Fed can be both late and slow to raise rates: Kocherlakota

Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis
Brian Snyder | Reuters

With the U.S. economy still years away from rising to normal levels of inflation and employment, the Federal Reserve can afford to wait until well into next year to raise interest rates, a top Fed official said on Tuesday.

Counseling extraordinary patience on eventual rate hikes, Minneapolis Fed President Narayana Kocherlakota laid out a case for waiting until the second half of 2016 to start raising rates, and to then raise them gradually so as to reach just 2 percent by the end of 2017. The U.S. central bank has kept rates near zero since December 2008.

Kocherlakota's view stands in contrast to the majority of his Fed colleagues, including Fed Chair Janet Yellen, who believe the Fed will need to start raising rates this year as the labor market improves and begins to put upward pressure on excessively low inflation.

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Some of the Fed's more hawkish policymakers have even pressed for a rate rise as early as June, warning that waiting too long could force the Fed to hike borrowing costs sharply to head off a potential surge in unwanted inflation.

"I continue to believe that it would be a mistake to raise the target range for the fed funds rate in 2015," Kocherlakota said in the text of remarks prepared for delivery to the Bismarck-Mandan Chamber of Commerce. "My own perspective is that, in light of the outlook for unduly low employment and unduly low inflation, the (Fed) can be both late and slow in reducing the level of monetary accommodation."

A surge in job growth last year has helped push the U.S. unemployment rate down to 5.5 percent, even as inflation has lagged below the Fed's 2-percent target for years. But the U.S. economy would need at least three more years of labor market improvement like last year to reach the "normal" level seen before the financial crisis, Kocherlakota said.

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