The Federal Reserve could hike interest rates by half a percentage point later this year, according to The Wall Street Journal.

Narayana Kocherlakota, the president of the Minneapolis Fed and a voting member of the rate-setting Federal Open Market Committee (FOMC) told the paper that such a hike is “certainly possible,” especially if the economy grows at roughly 3 percent this year as he expects.

The move would represent the first time the Fed has hiked rates since dropping its short-term interest-rate target to near zero in December 2008, in the midst of the financial crisis.

“If you consider monetary policy was appropriate at the end of 2010 … and then you see core inflation go up by 50 basis points over the course of 2011 … the usual response that we know from 20 years of thinking about monetary policy (or even more) is to raise the target rate by even more than that increase in observed inflation,” he told the newspaper. “So that means you should be raising the target rate by more than 50 basis points.”

In addition, if underlying inflation grows as he expects, Kocherlakota added that the Fed could wrap its second round of quantitative easing, also called “QE2”, at the end of June as originally scheduled. That program has the Fed buying back $600 billion of Treasury bonds in an effort to boost private lending. Critics of the program, including several Republicans, have warned it will lead to rampant inflation.

On that point, he said QE2 had more of an impact than he originally expected, raising near-term inflation expectations by more than he anticipated from extremely low levels.

But rather than selling off the bonds now in the Fed’s portfolio, Kocherlakota said that he would prefer if the Fed began raising short-term interest rates, because the Fed has a better understanding of how that change would affect the economy.

Kocherlakota is one of five voting members of the FOMC, which sets interest rate targets and has made decisions about the QE2 program.

He also supported the recent Fed decision to have Chairman Ben Bernanke hold quarterly press briefings shortly after the FOMC issues its statements. Doing so will allow Bernanke to “forcefully” get out a message about keeping inflation in check, he said.

(Source: The Hill)