Fed´s Moskow: Gradual rate hikes appropriate -
Wednesday, March 9, 2005 9:11:20 PM
afxpress.com
Fed's Moskow: Gradual rate hikes appropriate - UPDATE 2 CHICAGO (AFX) -- The Federal Reserve can continue to remove excessive U.S. interest-rate accommodation at a gradual pace, Chicago Federal Reserve President Michael Moskow said Wednesday. This policy remains appropriate because inflation -- and inflation expectations -- is still moderate, Moskow said in prepared remarks before the Investment Analysts Society of Chicago. "Given the low level of inflation, well-contained inflationary expectations and the remaining slack in the economy, we believe we can remove the remaining policy accommodation at a pace that is likely to be measured," Moskow said
But, he told the gathering, the Fed must be ready to respond more quickly should there be warning signs of bubbling price pressures. The bond market was less confident that the Fed is a step or two ahead of inflation. Yields on benchmark 10-year notes surged to an eight-month high above 4.5 percent Wednesday. The bond market was responding in part to the latest "Beige Book" assessment of regional economic conditions issued by the U.S. central bank
The report found that overall, "retail prices were generally flat or up modestly." However, a number of the 12 Fed districts reported "persistent pressures on input costs" although some noted that these pressures have eased since January. A number of districts also reported greater ease in passing along price increases. The Federal Reserve has said in its past several policy statements that interest rates can be lifted gradually, and it's done just that over the past six meetings -- bringing its target lending rate to 2.5 percent from a four-decade low of 1 percent in place last June. The central bank is widely expected to raise rates by another quarter-percentage point later this month. Moskow votes on interest rate policy in 2005
The Chicago Fed head said a relatively low unemployment rate is likely not a good representation of the amount of slack that persists in the U.S. job market
The jobless rate stood at 5.4 percent in February, up from a three-year low of 5.2 percent in January. It peaked at 6.3 percent in June 2003
Part of the decline can be attributed to a modest increase in the number of discouraged workers, Moskow indicated, pointing out that some labor market slack is simply the result of the U.S. economy being unable to sustain the job growth of the 1990s. The unemployment rate, as tracked by the U.S. Labor Department, can fall if fewer people are counted in the pool of job-seekers
"There is somewhat more slack in the labor market than the unemployment rate suggests -- but not much more," he said. "Combined with the moderate slack in other sectors of the economy, this suggests that the current level of output is only modestly below the level of potential output." But gauging the exact amount of economic slack is really a guessing game, according to Moskow "While we don't think that the gap has fully closed, we must be vigilant for any signs of emerging resource constraints generating inflationary pressures." Moskow downplayed the likelihood that rising oil prices will have a permanent impact on inflation. High crude is more likely to produce a spike in inflation, although because it may take some time for that spike to work all the way through the economy, "the inflation rate may be elevated for more than a short period." The April crude futures contract traded to an all-time high above $55 per barrel Wednesday. |
