Minneapolis Fed leader Kocherlakota maintains call for low rates

The head of the Minneapolis Fed is still standing with those who think the Fed should hold off on raising interest rates.

The U.S. job market still has ground to recover, and the Federal Reserve should be "extraordinarily patient" about raising rates, Minneapolis Fed President Narayana Kocherlakota said Thursday in Helena, Mont.

"I continue to believe that it would be a mistake to raise the target range for the fed funds rate in 2015," Kocherlakota said.

But speaking to reporters after the speech, he didn't sound confident that enough of his colleagues on the Federal Open Market Committee agree with him.

"I regret my lack of persuasiveness," he said. "I think we would have better policy if I were more persuasive than I have been able to be."

If he sounds glum, it's because Federal Reserve Chairwoman Janet Yellen has given a strong signal that rates will start to rise in the fall.

"If the economy continues to improve as I expect," she said earlier this month, "I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy."

Federal Reserve Bank of San Francisco President John Williams said Thursday he thought the Fed was likely to raise rates in the fall too.

Kocherlakota argues that the percentage of the overall population that has a job is still well below pre-recession levels, and the risk of inflation is still low, an outlook below 2 percent through 2017.

Others say the job market is improving enough that the Fed can ease out of its prolonged period of near-zero interest rates.

"Zero is no longer the correct rate, and the Fed should begin the process of normalizing rates," said Russ Koesterich, global chief investment strategist for BlackRock, who was in Minneapolis on Wednesday to meet clients.

The last time the economy was creating jobs as quickly as now was in the late 1990s, Koesterich said, when short-term interest rates were about 6 percent. Core inflation moved higher in April on steeper rent and medical bills, Koesterich said, which gives more ammo to those who want to hike rates before the end of the year.

"An autumn rate hike by the Fed and the resultant modestly higher rates are unlikely to be a catastrophe for markets," Koesterich wrote on Wednesday.

Speaking to a lunch meeting on Thursday, Kocherlakota said the economy needs three more good years of job growth like 2014 before it recovers pre-recession employment in the overall population. But 2014 was an encouraging year, because it dispelled the "hypothesis," Kocherlakota said, that the economy had entered a postrecession "new normal," and that monetary policy couldn't do anything to stimulate faster growth.

"The pessimists were wrong," he wrote in his prepared remarks. "And so the [Fed] should be aiming to facilitate a continuation of the 2014 improvement in the labor market."

He is not a voting member of the Fed's policy-setting Open Market Committee this year, and he plans to step down from his post in Minneapolis at the end of 2015.

Reuters contributed to this report.

Adam Belz • 612-673-4405 Twitter: @adambelz