Minneapolis Fed chief more upbeat about US economy

The president of the Federal Reserve Bank of Minneapolis is striking a somewhat upbeat tone about the economy.

While Narayana Kocherlakota's formal economic outlook has not changed over the past couple of months, he is optimistic about the U.S. economy's ability to withstand troubles in Europe and uncertainties at home.

When Kocherlakota speaks at events around the region, his speeches are often similar. His usual script these past couple of months has prophesied that U.S. unemployment will likely remain high, around 7 percent, by the end of next year. Wages won't grow much either, keeping inflation low. Taking questions at a chamber of commerce event on Wednesday in Edina, Kocherlakota's forecast hinted at a bit of sun.

"I think my outlook is almost identical to what it was two months ago," he said. "I might be feeling more upbeat, though. I've got a nicer tie on."

Kocherlakota's sunnier mood appears to stem partly from recent job growth. He said he has been pleasantly surprised by strength in the private sector. Non-government employers added nearly 400,000 jobs in the first couple of months of the year, despite uncertainty caused by the threat of the tax hikes and spending cuts known as the fiscal cliff, and the possibility of a budget stalemate shutting down the federal government.

"I think it's definitely a positive that the economy has been as strong as it has."

Despite those headwinds, Kocherlakota expressed cautious optimism about the private sector growing.

"We don't want to get too carried away with that in the sense that we've seen something like this before in the early part of 2010 and 2011," he said. "We don't want to draw too much [of a] conclusion from a few months of data. With that said, I think it's definitely a positive that the economy has been as strong as it has."

Kocherlakota said federal belt tightening will push down employment and prices. But he does not think another recession is likely. He said not even Europe's troubles will throw the US economy a big curveball, but will reduce demand there for American products.

"From a U.S. perspective, that's a limited drag on our growth," Kocherlakota said. "Our trade with Europe is relatively small relative to the economy as a whole."

He says the bigger concern is the extent to which instability in European financial markets would shake American financial system. He thinks the Fed's recent stress tests on America's big banks show that is not a concern. Some critics disagree, saying the stress tests were too lenient and gave banks an "easy A."

REASSURANCE OF PROGRESS, GROWTH

Still, Kocherlakota believes Americans should take comfort that the financial system can withstand extreme shocks and is unlikely to tank again soon.

"I think a lot of good work has gone on both within the banks and on the part of regulators to help the financial sector be more resilient against that sort of outcome," Kocherlakota said.

On the whole, Kocherlakota said that the economy in the Ninth Federal Reserve District, which covers a band from Montana to Michigan's upper peninsula, is closer to getting back to normal than the national economy is.

But he acknowledges that perceptions often lag behind the economic improvements.

"We've made a tremendous amount of progress. But my conversations with households and businesses -- their outlook doesn't always seem to be lining up with that information, and if I had a great answer for why that is, I just don't," Kocherlakota said. "It's something for us to keep apprised of."

Given the national economy's more modest improvements, Kocherlakota is continuing to advocate for easier money policies at the Central Bank. He repeated his call for the Fed to keep interest rates low until U.S. unemployment reaches 5.5 percent, below the Fed's current benchmark of 6.5 percent.

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