Kocherlakota Sees Cut in Interest on Reserves as One Fed Option

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said a reduction in the interest rate paid on reserves banks keep with the Fed is one policy tool available should the economy need more stimulus.

“There is some room to reduce that further to incentivize banks to lend,” Kocherlakota said today in response to an audience question after a speech in Minot, North Dakota. “This should be something that we think about” if further easing becomes necessary, even though a cut would have only “minimal effects on the economy,” he said.

Chairman Ben S. Bernanke has identified other ways to stimulate the slowing U.S. economy, including buying more bonds and altering the Fed’s communications on the outlook for interest rates.

Unemployment is “quite elevated” while inflation has been running below the central bank’s target, Kocherlakota said today.

The policy-setting Federal Open Market Committee, on which the district bank chief does not vote this year, is next scheduled to meet Sept. 12-13.

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