Minnesota Fed Chief Has These Concerns with the Economic Recovery

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In a speech to the Rochester area chamber of commerce delivered today in Rochester, Minnesota, Minneapolis Fed President Narayana Kocherlakota warned his audience of trouble ahead in the economy. Kocherlakota insisted that although “from the point of view of the macroeconomy, 2011 will be a better year than 2010,” projections were less than optimistic for growth in GDP, inflation, and unemployment.

Regarding expected GDP growth, the Fed President called the numbers for Q1 2011 (1.8%) “disappointing” adding, “This rate of growth is slow compared with the recovery in real GDP that took place after the recession of 1981-82.” Kocherlakota identified two principle factors behind the sluggish movement in GDP, laying the blame on small businesses’ reluctance to expand because of, “ongoing uncertainties about product demand” and the extensive list of problem banks (over 800 listed on FDIC records) that are striving to preserve capital and reduce bad debt rather than extent loans and credit to stimulate business.

Regarding unemployment, the Fed Honcho had some grim news, remarking, “I see the future course of unemployment as being shaped by two conflicting forces…the immediate progress will be slow: I expect that the unemployment rate will still be above 8 percent and is likely to be still close to 8.5 percent by the end of the year.”

Finally, weighing in on inflation, Mr. Kocherlakota argued that deflationary pressures would dissipate and the FMOC should respond by continuing to raise interest rates.

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