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Fed's Kocherlakota gives lukewarm welcome to U.S. unemployment drop

MINNEAPOLIS (Reuters) - One of the Federal Reserve's most dovish policymakers on Tuesday welcomed the recent drop in U.S. unemployment but warned the labor market has a long way to go until the U.S. central bank has reached its goal.

Sticking to his guns on the need for sustained policy accommodation, Narayana Kocherlakota, president of the Minneapolis Fed, said central bankers must also look through "transitory" changes in inflation like recent firming.

The speech, largely a repetition of one he gave here in May, pushed back against several months of better-than-expected jobs growth and a welcome, albeit measured, rise in prices. The data had some Wall Street economists predicting the Fed would raise interest rates earlier than previously thought.

While the decline from a recessionary peak of 10 percent to 6.1 percent in June "reflects a welcome improvement, the current unemployment rate remains above most forecasts of its expected long-run level," Kocherlakota said in prepared remarks.

He repeated that joblessness should drop to "just over 5 percent" longer term, and that the Fed's policy-setting committee - of which he is a member this year - is underperforming on its goal of achieving maximum sustainable employment.

The central bank has kept its key rate near zero for five and a half years and is still buying bonds to add yet more stimulus to the world's largest economy. It is not expected to begin to tighten for another year or so, given a pattern of erratic growth and inflation below a 2-percent target.

Yet in the 12 months through May, the personal consumption expenditures (PCE) price index was up 1.8 percent, the largest gain since October 2012. It had advanced 1.6 percent in April.

"I currently see the probability of inflation's averaging more than 2 percent over the next four years as being considerably lower than the probability of inflation's averaging less than 2 percent over the next four years," Kocherlakota said.

(Reporting by Jonathan Spicer; Editing by Meredith Mazzilli)

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