Minneapolis Fed President Narayana Kocherlakota delivered a spirited defense of the Fed's ultra-easy monetary policy and said the central bank may need to do more to stabilize prices and boost employment.

Last week, the Fed repeated its vow to keep U.S. interest rates near zero through at least mid-2015 and stuck to its plan to buy mortgage-backed securities to push down long-term borrowing costs.

The asset purchases, launched in September, mark the Fed's third round of quantitative easing since the financial crisis of 2007-2009. They are expected to bulk up a balance sheet already more than triple its pre-crisis size.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Some critics, including several inside the Fed, have said the central bank has gone too far.

"I strongly disagree," Kocherlakota told a town hall forum in Duluth, Minnesota. The economy suffered an unprecedented shock, its worst in 80 years, and such a shock requires an unprecedented response, he said.

At a lofty 7.8 percent, U.S. unemployment is well above the level that most economists see as healthy. Meanwhile, most Fed policymakers see inflation at or below the central bank's 2 percent target for the next year or two, Kocherlakota said.

"Given how high unemployment is expected to remain over the next few years, these inflation forecasts suggest that monetary policy is, if anything, too tight, not too easy," he said.

Fed officials believe the natural rate of unemployment - the level of joblessness that can be sustained over the long term without pushing up prices - is somewhere between 5 percent and 6 percent.

"Those estimates imply that we can see unemployment fall back down to between 5 and 6 percent without generating inflationary pressures above 2 percent," Kocherlakota said.

Kocherlakota, who as recently as six months ago called for monetary tightening by the end of the year, last month shocked global markets by urging the Fed to keep rates low until unemployment falls to 5.5 percent.

The low-rate vow can stay in place, Kocherlakota said, as long as inflation does not threaten to rise above 2.25 percent.

Kocherlakota did not elaborate on his proposal on Tuesday. But his remarks, delivered at the University of Minnesota campus, underscored Kocherlakota's conversion from a one-time policy hawk to an employment-focused dove.

"We should always judge the appropriateness of the Fed's policies in terms of how the economy is doing relative to the two Main Street goals that Congress has set for the FOMC," Kocherlakota said, referring to the twin goals of the policy-setting Federal Open Market Committee of price stability and full employment.

"Such a comparison," he said, "does not suggest that monetary policy is currently too easy."

FISCAL CLIFF

Kocherlakota's visit to Duluth happened to coincide with that of former President Bill Clinton, who was on campus earlier in the day rallying votes for Barack Obama ahead of next week's U.S. presidential election.

Fielding a wide range of questions from students and faculty, Kocherlakota avoided politics, but expressed optimism that lawmakers will reach an agreement to avoid the so-called fiscal cliff, a raft of automatic spending cuts and tax increases set to go into effect if Congress doesn't act.

As long as they avert the fiscal cliff, he said, the economy should grow at about a 2.5 percent pace — slightly swifter than this year, but not fast enough to bring down unemployment quickly.

"Growth has been so slow in this recovery, that we have not been able to create that many jobs," he said.

Asked if the deadly superstorm Sandy changes his outlook, Kocherlakota said that natural disasters, while exacting enormous human damage, tend to deliver little lasting economic impact.

Still, he said, "It's too early to tell the full economic ramifications of what the hurricane will be."

Kocherlakota was asked about the impact of the Fed's monetary policy on savers hurt by low returns on their money.

Those low returns have less to do with monetary policy than with the huge demand, in an uncertain economy, for safe assets, Kocherlakota said. That drives down interest rates and makes it hard to make money on savings, he said.

Once people become more optimistic and certain about the future, he said, interest rates will rise.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did