By Ann Saphir
ST LOUIS, March 20 (Reuters) - The U.S. Federal Reserve may need to start moving away from its near-zero interest rate policy as soon as this year, if unemployment continues to drop and inflation threatens to rise, a top Fed official said on Tuesday.
"I would see an argument for initiating that exit in 2012 or 2013," Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, told reporters after a speech at Washington University in St. Louis.
The U.S. unemployment rate, now at 8.3 percent, is likely to fall below 8 percent this year and into the "low sevens" by late next year, he said.
That improvement, along with what he expects to be above-target inflation for the next two years, may force the Fed to take its foot off the stimulus pedal, he said.
Kocherlakota's comments place him squarely among the most hawkish of Fed policymakers, more focused on the Fed's need to fight high inflation than on high unemployment.
His view is in the minority at the U.S. central bank, which last week reiterated its expectation that subpar economic growth will require the Fed to keep rates extremely low through late 2014.
Kocherlakota is not a voter this year on the Fed's policy-setting panel.
Fed Chairman Ben Bernanke and others have said more bond purchases remain an option, and have warned about removing stimulus too soon.
"You need to be attentive to where the economy is and not move too quickly to reverse the policies that are helping the recovery," Bernanke told students on Tuesday at George Washington University in the first of a four-part lecture series.
Speaking a few hours later in St. Louis, Kocherlakota echoed Bernanke's caution about too quickly reversing Fed stimulus.
"That's not something that's going to happen in two meetings," he said of the decision to raise rates. "You want to be deliberate and thoughtful about when you would want to take that step."
The U.S. central bank has kept interest rates near zero for more than three years, and has also bought $2.3 trillion in long-term securities to help push borrowing costs down further and pull the economy free from the effects of the Great Recession.
More purchases of long-term securities are not needed, said Kocherlakota, who voted against Fed easing twice last year.
"I don't feel the need for additional accommodation right now," he told reporters Tuesday.
While the Fed has successfully used easy monetary policy to keep inflation from falling too low, it is powerless, on its own, to boost employment much beyond the current low level, he said in a speech earlier in the day.
The central bank "is performing about as well as it can on both mandates" of price stability and full employment, Kocherlakota said. It needs help from non-monetary policies such as hiring subsidies to offset the uncertainty and adverse credit conditions that are keeping companies from adding jobs, he said.
But hiring subsidies will only work to boost jobs if the Fed eases monetary policy further, he told reporters later.
Asked if he will support more policy accommodation if lawmakers pass hiring subsidies, Kocherlakota said that such a response would be "appropriate" if subsidies put downward pressure on inflation, as he predicts they would.
Interestingly, his view that hiring subsidies are a key policy tool for boosting employment squares with a paper released Monday from the San Francisco Fed, whose chief is among the most dovish at the U.S. central bank
Rosier data so far this year, including falling unemployment and somewhat better housing data, has prompted traders to temper expectations for more bond-buying by the Fed, known as quantitative easing, with many betting the Fed's next move will be to start raising rates by mid-2013, more than a year ahead of the timetable suggested by the Fed.