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Fed's Kocherlakota: Don't raise rates to head off possible crisis

[March 22, 2014]  By Ann Saphir

WASHINGTON (Reuters) — Raising interest rates to head off a potential financial crisis is simply not worth it, a top Federal Reserve official said on Friday.

With economists forecasting very low odds of a crisis anyway, there is "little benefit to reducing or eliminating the probability of a crisis" with tighter monetary policy, Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, said in slides prepared for presentation to a conference in Washington.

If a crisis were to occur, unemployment would probably rise sharply, he said. But battling such an unlikely event by raising rates — which would almost surely increase unemployment — is a losing tradeoff, his reasoning suggests.

Fed officials and economists are increasingly concerned that keeping rates low for as long as the Fed has — since December 2008 — and buying trillions of dollars of bonds on top of that to push down borrowing costs could fuel unseen bubbles in the economy.

Some policymakers have even advocated using monetary policy to head off bubbles, although that does not appear to be the dominant view at the Fed.

Echoing a more broadly accepted approach, Kocherlakota said that supervisory tools are the best way to fight the risk of financial instability posed by low rates.

In his prepared slides, Kocherlakota did not mention his dissenting vote at the Fed this week, which marks him as one of the central bank's most dovish policymakers.

(Reporting by Ann Saphir; editing by Leslie Adler)

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