Fed's Broaddus sees need for U.S. rates to rise
By Mark Thompson
VIENNA, June 15 (Reuters) - Federal Reserve Bank of Richmond President Alfred Broaddus said on Thursday there was still a clear need for U.S. short term real rates to rise despite tentative signs that the 10-year economic expansion was starting to slow.
``The apparently higher trend productivity growth in the U.S. economy...requires higher real interest rates to maintain macroeconomic balance,'' Broaddus told the Austrian National Bank's annual economics conference.
``In order to prevent a re-emergence of inflationary pressures and, in doing so, to sustain the expansion, U.S. monetary policy must allow short-term real interest rates to rise.''
Separately, he suggested that some of the apparent slowdown could be accounted for by the recent rise in gasoline prices.
``There are some signs of a deceleration in the U.S. expansion and some of that may be due to the gasoline price spike,'' he told Reuters in an interview on the sidelines of the economics conference.
U.S. gasoline prices have hit record highs in recent weeks, driven by a surge in world crude oil prices and tight supply resulting from a switch to new, cleaner fuel grades.
Broaddus said it was unclear whether the inflationary impact of oil, now near nine-year highs, had peaked.
``It is difficult to say. There's no doubt that when you have a spike like this it can cause disruptions, but it's my view that we will see declining oil prices later this year.''
INCOME EXPECTATIONS PUSHING DEMAND
Speaking to the conference, the central banker said expectations of higher future income were leading to increased demand from households and businesses which could not yet be matched by increased output.
``This mismatch between expected future resources and currently available resources, in my view, is the principal factor creating the present aggregate demand-supply imbalance in the U.S. economy.''
Broaddus is a voting member of the Federal Open Market Committee which next meets June 27 and 28. The Fed has raised interest rates six times in the last year in an attempt to curb inflationary pressures from the longest economic expansion in U.S. history.
He said the need for ``rate increases'' seemed clear and added that the magnitude and timing would be aimed at reaching aggregate supply-demand balance.
``In principle, of course, we want to allow rates to rise to the level where the growth in aggregate current demand equals the sustainable growth in productive capacity.''
Federal Reserve Bank of Kansas City President Thomas Hoenig, speaking in Kansas City on Wednesday, said he saw some signs of a U.S. economic slowdown, but needed more evidence to conclude it was definitely decelerating.
Meanwhile Robert Parry, head of the Federal Reserve Bank of San Francisco, said in San Diego on Wednesday he still saw inflationary pressures but was cautiously optimistic that growth was slowing in the world's largest economy.
Gross domestic product growth has equalled or exceeded four percent in each of the last four years and was running at an annual 5.4 percent in the first three months of this year.
``These are exceptionally high growth rates at what is presumably an advanced phase of this expansion,'' Broaddus told delegates at the conference in Vienna.
He said there were tentative signs that the expansion was starting to slow but added that an inflationary process may be about to begin now mainly due to tight labour markets causing wages to rise more rapidly than productivity.
``Trend productivity growth at this higher rate (2.5-3.0 percent currently) would imply that the economy's 'speed limit' -- its maximum sustainable, non-inflationary growth rate -- is now in the neighbourhood of 3.5-4.0 percent.''
The Fed's so-called Beige Book, a coast-to-coast survey of economic conditions, released on Wednesday, showed ``solid economic growth'' but with glimmers of slowing in areas like borrowing and homebuilding.
``Indications of worsening price inflation, while not widespread, are reported by several districts,'' the report said.
06:27 06-15-00
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