WASHINGTON (MNI) – Minneapolis Federal Reserve Bank President
Narayana Kocherlakota repeated his concern Thursday that further
quantitative easing is likely to have a “muted” impact on markets, and
policymakers will have to balance that with other available tools.

In a speech prepared for the UMACHA Payments Conference in
Bloomington, Minnesota, Kocherlakota explained the options available to
the Fed, and cautioned that each “has benefits and drawbacks that must
be balanced against each other. With QE, I would say that the multiple
novel effects make the calculus even more difficult than usual.”

Kocherlakota, who will be a voting member of the policy-setting
Federal Open Market Committee in 2011, repeated the outlook and analysis
and policy analysis from his Sept. 29 speech in London.

He also stressed that with the FOMC only authorized by Congress to
buy a limited set of securities, the presumption is that “any new
purchases would take the form of long-term Treasuries.”

“My own guess is that further uses of QE would have a more muted
effect on Treasury term premia,” he repeated. “Financial markets are
functioning much better in late 2010 than they were in early 2009. As a
result, the relevant spreads are lower, and I suspect that it will be
somewhat more challenging for the Fed to impact them.”

He again cited the Minneapolis Fed’s outlook on the economy that he
presented to the last FOMC meeting, which he summarized: “In terms of
GDP, I believe that a modest recovery is under way and is likely to
continue. In terms of inflation, I expect a slight but welcome uptick
over the next 18 months. Finally, in terms of unemployment, I see
ongoing problems in labor markets.”

He estimates inflation “will rise back into the more desirable
1.5-2 percent range in the second half of 2011,” while “GDP growth will
be around 2.4 percent in the second half of 2010 and around 2.5 percent
in 2011.”

Unemployment, however, is expected to remain above 8% well into
2012, he said. “the lack of vitality in the U.S. labor market can only
be termed disturbing.”

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MGU$$$,M$$CR$,MMUFE$]