By Steven K. Beckner

(MNI) – Minneapolis Federal Reserve Bank President Narayana
Kocherlakota said Monday that fiscal and other uncertainties are
creating “a large drag” on the economic recovery.

Kocherlakota, who will be a voting member of the Fed’s policymaking
Federal Open Market Committee next year, also voiced concern about
“unprecedentedly high” long-term unemployment and reiterated his belief
that newly resumed quantitative easing will have only “modest” impact on
the economy.

Kocherlakota, in remarks prepared for delivery to the Sioux Falls,
South Dakota Rotary Club, analyzed labor markets and came to some gloomy
conclusions.

He distinguished between the short-term unemployed (those out of
work for less than six months) and the long-term unemployed (those out
of work for more than six months).

Regarding the former, he said, “But we have made progress — in
some sense, we’re about halfway back.” However, he added, “this recovery
in the six-months-and-under unemployment rate has definitely slowed
since May.”

He noted that by the end of October 2010, 5.6% of the labor force
was short-term unemployed — down from 6.7% in June 2009, though still
up from 4.1% in December 2007 at the start of the recession.

Kocherlakota was far less upbeat about the long-term unemployed.

“The problem is that the long-term unemployment rate has not
exhibited even this limited amount of progress,” he said, noting that
the rate has risen from 0.9% in December 2007, to 2.8% in June 2009, to
4% in October.

“This number is unprecedentedly high,” he said. “As well, nearly
three-fourths of the long-term unemployed had in fact been unemployed
for over a year.”

“If history is any guide, this year-plus unemployment rate will
only revert to prerecession levels after several years,” he added.

Kocherlakota said high levels of unemployment mean that each
working person now has to support more non-working people with adverse
effects on the U.S. standard of living.

Aside from uncertainties in the labor market, he said, “I believe
that overall uncertainty is a large drag on the economic recovery.”

As an illustration, he cited the negative 20 basis point yield on
Treasury inflation-protected securities (TIPS). “This means that people
are giving up $100 today in exchange for about $99 of purchasing power
in five years.”

“Savers are willing to lose purchasing power over time rather than
consume more today,” he said. “Similarly, firms are willing to lose
purchasing power over time rather than making more capital
expenditures.”

Kocherlakota traced this uncertainty about the next five years in
part to public uncertainty about future taxes and government spending.

“The federal debt in the hands of the public has gone up by over 50
percent over the past three years,” he observed. “At the same time, the
U.S. government has taken on responsibilities for the debts of Fannie
Mae and Freddie Mac. It has enacted a new health care plan.”

“Do these changes mean that taxes will rise?” he asked. “If so,
taxes on what forms of economic activity? Does it mean that government
will cut back on its provision of important types of public goods or on
entitlement programs? If so, what kinds of public goods or entitlement
programs?”

Kocherlakota said “investors and savers need a lot more clarity
about what those answers might be.” And he warned, “Absent such clarity,
the economic recovery will be slower than it otherwise would be.”

As he did in a speech last week, Kocherlakota said he “did express
support” for the second round of quantittaive easing (QE2) on Nov. 3 and
called it “a move in the right direction.”

But he also said, “I believe that there are good reasons to suspect
that the ultimate effects of any amount of QE are likely to be
relatively modest.”

** Market News International **

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