Fed should cut interest rates, Kocherlakota says

Current low inflation gives the Fed a "huge opportunity" to do more to revive the labor market, Minneapolis Fed President Narayana Kocherlakota said in remarks prepared for delivery in Mankato, Minn.

"To best fulfill its congressional mandates, the (Fed's policy-setting) committee should be considering reducing the target range for the fed funds rate, not increasing it," Kokcherlakota said.

The Fed slashed that rate to near zero in December 2008 and has kept short-term borrowing costs there ever since to stimulate spending and keep the U.S. economy from falling into a growth-sapping round of deflation.

It also bought trillions of dollars of long-term securities to push down borrowing costs further, and made a series of promises to keep rates low for long periods.

But now, most Fed policymakers want to put that period of unconventional policymaking behind them. The Fed stopped buying long-term securities last year, and now, with the unemployment rate at 5.1 percent, Fed Chair Janet Yellen is gearing up to raise interest rates this year.

She said in September that policymakers had not given serious consideration to cutting rates, as some countries in Europe have done.

To Kocherlakota, though, inflation that has languished below the Fed's 2 percent target for more than three years means that the Fed has a "free lunch" to keep easing policy and boost jobs.

The number of employed people of prime working age in the U.S. as a percentage of the population fell during the Great Recession by 5 percentage points to 75 percent, and has only recovered to about 77 percent since. Kocherlakota said on Thursday he sees no reason why the Fed should not aim to boost the ratio back to 80 percent, an increase that would mean jobs for millions more people.

The Fed should not raise rates until 2017, he said, and then should boost them at a pace of about 2 percentage points a year. That's a more rapid pace than most Fed officials see the Fed raising rates if they start later this year.

If inflationary pressures build, he said, the Fed could simply raise rates more rapidly to offset.

Kocherlakota will not vote on Fed policy before he leaves his post at the end of the year.

(Reporting by Lindsay Dunsmuir; Writing by Ann Saphir; Editing by Meredith Mazzilli)