Fed ready to quicken pace
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Moskow says bank will react sooner if economy overheats
July 23, 2004
(Reuters) — The Federal Reserve can probably raise interest rates at a measured pace but if the economy overheats the central bank will move more quickly, Chicago Fed President Michael Moskow said Friday.
``With inflation currently expected to remain relatively low, policy accommodation can likely be removed at a measured pace,'' Moskow told an economic breakfast.
``The Federal Reserve will be vigilant to make sure that inflationary pressures do not jeopardize our goal of price stability. If the economy begins to overheat, the Fed will move more aggressively toward a neutral policy stance,'' he said.
Moskow told reporters after his speech that the recent soft patch in consumer spending and factory production in June is unlikely to linger. ``If it continues for many months I think it would have an impact on business confidence, but I don't think it will continue,'' he said.
In a speech that echoed the themes of Fed Chairman Alan Greenspan's testimony to Congress earlier this week, Moskow also said the Fed's semiannual forecasts released this week show inflation should remain low, with core prices seen up 1.75 percent to 2.0 percent this year.
He said although prices for a wide range of goods and services, from clothing to pet services, have been increasing more sharply in recent months, these have been offset by price declines elsewhere.
``We are carefully monitoring the persistence of these developments,'' he added.
Futures markets suggested that prices of energy and other commodities may have peaked, and unit labor costs have been falling for the past two years.
``Outright declines are unlikely to continue as labor markets tighten — in fact unit labor costs edged up the past couple of quarters — but strong productivity trends should help keep overall cost pressures in check,'' Moskow said.
Excess capacity and relatively high unemployment will also stop producers from raising prices quickly and causing an acceleration in inflation as the U.S. economic recovery reaches a ``cruising altitude,'' Moskow said.
``Unemployment is still higher than we would expect it to be on a sustaining basis,'' he said.
Moskow, who is not a voting member on the Fed's policy committee this year, played down the recent run of weaker-than-expected economic data. ``On average economic growth in the first half of this year was quite solid,'' he said.
The Chicago Fed chief said it was difficult to define a ''neutral'' level of interest rates that neither boosts nor drags on the economy.
Though Fed officials have been reluctant to say where neutral lies, economists agree it is well above the current 1.25 percent federal funds rate.
Moskow acknowledged the Fed's first interest rate rise in June was ``only one step'' in moving policy toward a neutral stance.
Since the economy has gathered steam over the past year and inflationary pressures have picked up, some in the bond market have raised concerns that official rates are too low and risk fueling higher inflation down the road.
Futures markets expect the Fed to continue raising rates to about 2.25 percent by the end of this year and at least 3.5 percent by the end of 2005.
Moskow said the looming November presidential election would ''absolutely not'' prevent the Fed from raising rates in September if it feels such a move is needed.
``Politics never enter the room when we talk about monetary policy,'' he said.
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