Portales' Kos: No Fed rate hike on tap

By Ros Krasny

NEW YORK (Reuters) - Worries about a spike in U.S. inflation are overdone, and as a result the Federal Reserve is unlikely to raise interest rates for at least the rest of 2009, a former top Federal Reserve official said on Wednesday.

Dino Kos, managing director at the research firm Portales Partners, said U.S. economic growth is likely to be tepid when the nation emerges from recession, with gross domestic product growth of 1 to 2 percent likely in 2010.

"Two percent would look really, really good," Kos said at the Reuters Investment Outlook Summit in New York.

Kos was executive vice president and head of the Markets Group at the New York Fed from 2001 to 2006, responsible for the implementation of monetary policy directives and reporting to the policy-setting Federal Open Market Committee.

A recent jump in interest rates on U.S. Treasury debt represents a "normalization" from levels reached when the economic outlook was extremely bleak, rather than panic about inflation, Kos said.

"It's hard to see upward pressure on inflation in the near term," he said. "There is an enormous amount of slack in the economy."

U.S. consumer prices for May fell by 1.3 percent year on year, the largest decline since 1950, the Labor Department reported on Wednesday.

Inflation hawks inside and outside of the Fed have focused less on the U.S. output gap, or how far the economy is from its "potential" level, and more on the huge expansion of the Fed's balance sheet.