Fed Speakers Say Inflation Still a Risk
By Knut Engelmann
WASHINGTON (Reuters) - Top Federal Reserve officials said on Tuesday the U.S. economy was slowing to a more manageable pace but insisted that higher inflation still posed the main threat to the nation's record-expansion.
Their plea for continued inflation-fighting vigilance came against the backdrop of fresh data suggesting increasingly muted activity in the world's top economy after ten years of non-stop growth.
``On the whole, the economic environment seems to be in much better balance than it was in May, but the risk of heightened inflation pressures still dominates,'' Chicago Fed President Michael Moskow told an audience in Madison, Wis., echoing a statement the Fed released after the last meeting of its rate-setting Federal Open Market Committee on Nov. 15.
The U.S. central bank has kept key short-term interest rates on hold since May, following six rate rises since June 1999. But it has repeatedly warned that rising inflation is the prime risk to the economy's record expansion, leaving the door open at least in theory to renewed rate increases in the near future.
The Fed next meets on Dec. 19 amid expectations it will keep borrowing costs unchanged once again as signs of a slowdown in the world's biggest economy mount.
``Most of the available economic information since May has pointed to a moderation in demand growth from the frenetic pace we observed in late 1999 and early 2000,'' said Moskow, who will be a voting member of the FOMC next year.
Rising productivity growth has helped narrow the gap between demand and the economy's supply potential, he said.
``Moreover, demand is likely to be tempered a bit further by recent tightening in financial market conditions,'' Moskow added. ``Indeed it's possible the economy could expand at a rate below potential for awhile.''
WAIT AND SEE
Speaking in Portland, Ore., San Francisco Fed President Robert Parry also said that while there was growing evidence of a U.S. slowdown, it was ``too soon to know for sure if we've really got the inflation risks under control.''
``While tighter financial conditions give us reason to think the slowdown is likely to continue, we'll have to wait and see,'' he added.
According to the latest data, economic growth slowed to an estimated annual pace of 2.7 percent in the July-September period from a steaming 5.6 percent in the second quarter, encouraging Fed policymakers that their campaign to prevent economic overheating is bearing fruit. Updated third quarter growth figures due on Wednesday were expected to be even weaker.
``The last round of rate increases are probably still affecting the economy,'' said Parry, who is a voting member of the FOMC this year.
Many in financial markets now believe the economy will slow much more dramatically in the months ahead, and wonder whether it is time for the Fed to cut borrowing costs. Sharp declines in the stock market that could sap consumer confidence and mounting difficulties by many U.S. firms to raise fresh financing in capital markets have added to their concerns.
Yields on most U.S. Treasuries fell on Tuesday after the latest government data showed orders for costly U.S. manufactured goods like cars and refrigerators fell a sharp 5.5 percent last month, the first decline since July and far more pronounced than economists had expected. U.S. stock prices, particularly in the technology sector, ended lower.
``The economy has received several body blows going into the fourth quarter that would indicate a slowing of the economy and capital spending,'' said Jerry Jasinowski, head of the National Association of Manufacturers.
MONETARISM REVISITED
St. Louis Fed President William Poole, a voting FOMC member next year, told an audience in London the Fed needed to act preemptively to fight inflation and should monitor underlying factors such as money supply growth that could cause price pressures to flare up.
In a lecture at the City University Business School, Poole said that both expected and actual inflation rates were a poor guide for Fed policy since they may be slow to adjust and were in any case dependent on the central bank's own actions.
``We need to concentrate on the underlying determinants of inflation and early warning signs,'' Poole said.
``The rate of money growth, spreads in financial markets, the supply-demand balance across industries in general and the behavior of specific prices likely to lead overall inflation are relevant,'' added Poole.
Fed Chairman Alan Greenspan has repeatedly cast doubt on the usefulness of money supply measures as a guide to future inflation, arguing the relationship between the two variables has been too sketchy and unpredictable in recent years.
Speaking to reporters after delivering his speech, Poole added the long-run risks for U.S. inflation were on the upside. ''The bigger risk we face is that inflation is more likely to rise than fall'' over the next three to 10 years, he said. |
