By Nathan Kavanagh
HELENA Mont. (Reuters) - A top Federal Reserve official on Thursday said he believes U.S. interest rates are too high, and had no "good answer" when asked why the Fed is reducing its efforts to push borrowing costs down.
"Interest rates are not low enough," Minneapolis Federal Reserve President Narayana Kocherlakota said at a Town Hall meeting in Montana, citing subdued inflation and "unacceptably high" unemployment as evidence.
The fact that the Fed has not been able to achieve its twin objectives of maximum employment and 2-percent inflation suggests the need for lower rates, he said.
"Given where we are with inflation, I think that it’s challenging to know why we are removing stimulus from the economy at the rate that we are," he said. "I think that is a challenging question, and I don’t really have a good answer."
The Fed has kept short-term interest rates near zero since December 2008 in an effort to pull the economy from its worst recession in decades. It has also bought trillions of dollars of Treasuries and housing-backed securities to push borrowing costs down further and spark investment and hiring.
But with the unemployment rate, at 6.2 percent, well below its recession-era peak of 10 percent, and inflation showing no signs of falling further, the Fed has begun to trim its monthly bond purchases, aiming to end them completely by October.
Kocherlakota is a voter on the Fed's policy-setting panel this year and has argued forcefully that the Fed should do more to try to bring inflation up and unemployment down. Still, he has voted all but once with the majority at the Fed to continue to trim the bond-buying program.
On Thursday, Kocherlakota forecast inflation to stay below the Fed's 2-percent target until 2018, a sign that the country is not taking full advantage of its resources.
It is a very different picture from the too-high inflation that plagued policymakers 40 years ago, Kocherlakota said at the town hall, held at Carroll College in Helena.
Back then, U.S. President Gerald R. Ford launched an anti-inflation campaign and commissioned Meredith Willson to write a song to go with it. "Who needs inflation? Not this nation," Kocherlakota quoted from the song, to chuckles in the largely student audience.
"Mr. Willson’s pithy characterization was spot on in 1974," Kocherlakota said. "But 40 years later, I would suggest that it’s exactly backward. Right now, this nation needs more inflation."
Some of Kocherlakota's colleagues have begun to worry publicly that the Fed's super-easy monetary policy could fuel inflation if the central bank does not begin to raise rates soon. Kocherlakota disagreed.
"I don’t think we’ve been hitting maximum employment successfully, and we haven't been hitting 2-percent inflation," he said. "Both of those seem to call for lower interest rates... the problem is not that they are too low."
(Reporting by Nathan Kavanagh; Writing by Ann Saphir; Editing by Cynthia Osterman, Lisa Shumaker and Ken Wills)