Low unemployment in the U.S.
may be causing ''inflationary pressures'' to build, said Jack
Guynn, president of the Federal Reserve Bank of Atlanta,
suggesting that Federal Reserve policy-makers will boost interest
rates to cool off the economy.
''Tight labor markets may be signaling that we have an over-
stimulated economy,'' Guynn told the National Association of
Women Business Owners in Atlanta today.
Echoing comments he made Monday, Guynn also said that strong
productivity gains that have allowed the U.S. economy to expand
without inflation may not continue.
''It's not likely that the extraordinary productivity gains
that we have had in recent quarters will hold at the levels we
have been seeing,'' he said. If the Fed were to overestimate
productivity, ''We begin to get inflationary pressures.''
Among other risks, energy and commodity prices are rising,
as Asia's economies have started to recover, Guynn said. At the
same time, investors have begun to anticipate rising inflation,
driving up bond yields, and the money supply has grown faster
than historical averages, he said.
''When I look at the total list of things that could work
against us, I have the sense that, in fact, inflationary
pressures may be beginning to build,'' he said.
Complaints from business people in the Southeast that they
are having trouble finding qualified employees have become ''the
thing I hear most about as I go around the region,'' Guynn said.
Echoing Greenspan
Guynn's comments echoed those of Fed Chairman Alan
Greenspan, who this week suggested the Fed may need to raise
interest rates at least once.
Should labor markets continue to tighten, ''significant''
wage increases in excess of productivity growth will ''inevitably
develop,'' Greenspan said. Earlier this month, the Labor
Department reported that the U.S. unemployment rate fell to 4.2
percent in May -- tying a 29-year low -- and average hourly
earnings accelerated.
''Modest preemptive actions'' can prevent developing
''unbalances'' from threatening an economic expansion that so far
is showing few signs of inflation, Greenspan said.
Guynn isn't a voting member of the Federal Open Market
Committee, which sets monetary policy, although he does
participate in the group's deliberations. Members of the FOMC
reduced the overnight bank lending rate in three steps between
September and November last year, after financial markets almost
froze following Russia's default on its debts. The committee has
left the rate at 4.75 percent since then, although at its last
meeting, the members adopted a so-called bias towards higher
interest rates.
The FOMC next meets June 29-30. Most Wall Street economists
expect the central bank to push the overnight rate higher at that
meeting, according to a Bloomberg News survey.
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