Minneapolis Federal Reserve Bank President Narayana Kocherlakota (far R) poses with board members at a drilling site near Stanley, North Dakota, August 16, 2012 in this handout photo supplied by Minneapolis Federal Reserve Bank.

CHICAGO | Tue Oct 9, 2012 8:55am EDT

CHICAGO (Reuters) - Narayana Kocherlakota surprised economists around the world last month when he called on the U.S. central bank to hold interest rates near zero, possibly for several years to come.

One of the newest members of the Federal Reserve's top table had been seen by many in financial markets as one of its more inflation-focused "hawks."

Only six months earlier, the head of the Minneapolis Fed had been calling for a tightening of monetary policy by the end of this year.

So it was considered an unusually swift about-face when Kocherlakota proposed keeping the Fed's benchmark rate near zero until unemployment is brought way below its current level.

For those who know him well, it was no surprise.

"Narayana was a very independent student. That was something I saw at a very young age," said Lars Peter Hansen, a professor at the University of Chicago, where Kocherlakota completed his dissertation at age 23, having entered Princeton University just before his 16th birthday.

"I've never really seen him as a person who is rigid."

Kocherlakota was unusually eclectic in his research and he jumped from one discipline to another with ease, Hansen said.

Born in Baltimore, Kocherlakota spent most of his childhood in Winnipeg, Canada, where his parents taught statistics at the University of Manitoba. His father was an immigrant from India and his mother hailed from a Pittsburgh suburb.

Kocherlakota now lives with his wife, also an economist, and two Australian shepherd dogs in the Minneapolis suburb of Golden Valley, where he watches "a totally embarrassing amount of sports on TV," as he told an employee newsletter after taking the top job at the Minneapolis Fed in 2009.

As Wall Street Fed-watchers reassessed him after his headline-grabbing speech last month, Kocherlakota said he had been persuaded by fellow economists that lower interest rates could indeed boost employment, despite his previous skepticism.

Work by Edward Lazear, a professor at Stanford Graduate School of Business, and a speech by Fed Chairman Ben Bernanke at this year's Jackson Hole conference convinced him that the U.S. labor market had not undergone such major, structural changes that monetary policy would not help reduce joblessness, he said.

He was also struck by how inflation had ticked down more than he had expected.

Kocherlakota was keen to downplay talk of a sudden conversion to a new view on the economy. "I wouldn't say I woke up one morning and thought it; it was more a cumulative process," he told reporters.

THE VIEW FROM THE BUS

Colleagues put it simply: he cares about on-the-ground data, and he knows how to listen.

That much was clear in August when Kocherlakota, who turns 49 on Friday, donned a pair of jeans and took his board's nine directors on a tour of the booming oil fields of North Dakota.

In a 14-hour, 300-mile bus trek, they visited a fracking rig, a pipeline, a workers' camp, and a natural gas plant. They heard locals speak of life in the heart of the U.S. energy boom.

"His style is to let everybody else do the talking and he listens intently," said Lawrence Simkins, one of the board members and president of Montana-based Washington Cos, a privately owned transportation and equipment firm.

As the bus maneuvered truck-clogged roads, Kocherlakota got into a discussion with another director about the mental health toll on workers separated for months on end from their families.

Despite his reputation as an inflation hawk, Kocherlakota's push for the Fed to do more to stimulate the economy was not a bolt from the blue. He praised its first round of bond buying, which began in 2008, and backed its second round in 2010.

Those programs took place against the backdrop of a U.S. economy in crisis or still limping its way back to recovery.

Last year Kocherlakota opposed further Fed easing because the economy, in his view, was mending.

At the same time, he liked the thinking behind a proposal from Chicago Fed President Charles Evans, one of the Fed's most dovishly growth-focused policymakers, to promise to keep interest rates low until unemployment fell below 7 percent, as long as inflation did not threaten to breach 3 percent.

Tying policy to economic milestones, Evans argued, boosts its effectiveness.

"I thought he framed things pretty nicely," Kocherlakota said last October. "But actually getting into the quantities, that's something I'd have to think about more, and also discuss with my colleagues more."

Less than two months later, he had his own outline: The Fed should spell out how it would respond to a rise or decline in unemployment, and to changes in the inflation outlook.

UNLIKELY PARTNERS

Kocherlakota and Evans sit next to one another at the 27-foot-long elliptical mahogany table around which Fed officials gather every six weeks in Washington to decide monetary policy.

They had made an unlikely couple, given their long contrasting views on the role of interest rates in stirring jobs growth.

That changed at the Fed's meeting last month. As fellow policymakers agreed to a third and this time open-ended round of bond-buying to spur the U.S. economy, Kocherlakota said inflation running below his forecast left room for the Fed to keep rates low for years.

For a week, he kept his plan under wraps before announcing it to an audience of roughly 80 people at a community college in Western Michigan, known locally for training ski-lift operators.

He said the Fed should not even start talking about tightening monetary policy until the jobless rate dropped to 5.5 percent - a big drop from just under 8 percent in September -- or until the medium-term outlook for inflation topped 2.25 percent.

The plan drew immediate criticism.

If the Fed adopted it, "inflation credibility would not be eroded. It would be exploded," said Eric Green of TD Securities, a former senior economist at the New York Fed. "His views were quite different six months ago and will no doubt be very different again" when he rotates into a voting spot on the Fed's policy-setting panel in 2014.

But Kocherlakota's former professor Hansen said the plan is not a radical shift, noting it allows very little deviance from the Fed's 2-percent inflation goal.

So far, Kocherlakota has won little public backing from Fed colleagues.

Hawkish policymakers worry that more Fed easing will not help the economy and could fuel inflation expectations.

San Francisco Fed President John Williams, a centrist, said the plan risks overheating the economy.

By contrast, Chicago's dovish Evans fears it could cause the Fed to tighten too soon because it only allows "a very modest increase in inflation" over its 2-percent target.

Nonetheless, the relatively new idea of tying Fed policy to specific economic turning points is gaining traction.

Fed policymakers left out any numerical thresholds for joblessness and inflation when they began their new round of asset purchases last month. But most still think doing so would be useful in providing more clarity about their policy intentions, minutes of their most recent meeting show.

Those who know Kocherlakota caution against discounting his persuasive powers, which helped him get his job in the first place, according to Mary Brainerd, chief executive of health-insurance firm HealthPartners and Minneapolis Fed Board chair.

"Because he communicates clearly and thoughtfully, he's very compelling," she said.

(Additional reporting by Pedro da Costa in Washington; editing by William Schomberg, Tim Ahmann and Gerald E. McCormick)

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