NICOLLET, MINN. - Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank may need to begin raising interest rates as soon as this year as inflation may exceed its 2 percent target next year.
"My own belief is that we will need to initiate our somewhat lengthy exit strategy sometime in the next six to nine months or so, and that conditions will warrant raising rates sometime in 2013 or, possibly, late 2012," Kocherlakota said Tuesday in Nicollet, in southern Minnesota near Mankato.
Federal Open Market Committee members expressed no sentiment for increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target, according to minutes of their March 13 meeting. U.S. employers added 120,000 jobs in March, the fewest in five months, a report showed April 6.
Kocherlakota said that he sees inflation, as measured by the personal consumption expenditures index, of around 2 percent this year, rising to 2.3 percent in 2013. He expects the unemployment rate to fall to 7.7 percent at the end of 2012 from its current level of 8.2 percent. By the end of 2013, he expects an unemployment rate of around 7 percent, he said.
The regional bank chief said he wouldn't rule out that higher rates may be warranted as early as the first half of 2013. He also said accelerating the policy change involves risks to the recovery.
"If the sense of the committee was to move the date to early 2013 I would be open to that possibility," Kocherlakota told reporters after his remarks to the Southern Minnesota Initiative Foundation. "That's something I'd be happy to talk about and interested in thinking about, but I think there's always a danger in moving policy levers too much too fast."
Fed presidents rotate voting on monetary policy, with Kocherlakota next voting in 2014. The Minneapolis Fed chief dissented from two decisions of the FOMC last year to increase monetary stimulus.