By Brai Odion-Esene

WASHINGTON (MNI) – Minneapolis Federal Reserve President Narayana
Kocherlakota reiterated Wednesday that the U.S. economy is experiencing
a “modest recovery,” and that the problems in the labor market might be
better addressed using measures other than monetary policy.

In remarks prepared for business leaders in Missoula, Montana —
updated from the one he gave in Marquette, Michigan August 17 —
Kocherlakota restated his belief that, “I believe a modest recovery is
under way in the U.S. and is likely to continue.”

In terms of inflation, he predicted “a slight but welcome uptick”
over the next 18 months. But with regards to the Fed’s other mandate of
full employment, Kocherlakota said he sees current and future problems
in labor markets “that may be difficult to combat using the tools of
monetary policy.”

Speaking of his outlook for the growth in U.S. economic activity
this year and the next, Kocherlakota said he is now predicting that,
together over 2010 and 2011, GDP will grow around 2.8% per year.

The outlook for unemployment is more sombre, with Kocherlakota
describing the lack of vitality in the labor market as “disturbing.”

“I do not expect the unemployment rate to decline rapidly, and so I
expect it to be above 8.0 percent into 2012,” the Fed official said,
repeating a prediction made in his last public appearance.

The problem in the labor market, Kocherlakota asserted, is one of
“mismatch” — Firms have jobs, but can’t find appropriate workers. The
workers want to work, but can’t find appropriate jobs.

“How much of the current unemployment rate is really due to
mismatch?” he asked. “The answer seems to be a lot.”

And although Congress charged the Federal Reserve with ensuring
high employment levels, Kocherlakota countered that, “The mismatch
problems in the labor market do not strike me as readily amenable to the
kinds of monetary policy tools currently available to the Fed.”

They may well be amenable to other types of policy tools, like job
retraining programs or foreclosure mitigation strategies, he argued.

And despite the rising pressure on the Fed to cure all that ails
the U.S. economy, “central bankers alone cannot solve the world’s
economic problems,” Kocherlakota said, harkening back to a comment made
by Federal Reserve Chairman Ben Bernanke Aug 27 at the Kansas City Fed’s
Jackson Hole symposium.

While Kocherlakota’s remarks did not break any new ground with
regards to monetary policy — restating the reasoning behind the FOMC’s
August move to reinvest mortgage principal payments in Treasuries — he
did say unequivocally:

“I would have voted for the FOMC statement in August had I actually
been a member of the committee.”

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

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