FED WATCH: Inflation Talk Yields Differing Rate Paths
DOW JONES NEWSWIRES
August 22, 2006 6:09 p.m.
By Michael S. Derby
A DOW JONES NEWSWIRES COLUMN
ATLANTA (Dow Jones)--Two veteran Federal Reserve officials took the stump Tuesday to reaffirm the central bank's commitment to curtailing inflation. But the manner in which they discussed the outlook underscored the still uncertain way forward for interest rates.
Outgoing Federal Reserve Bank of Atlanta President Jack Guynn spoke before a hometown group, while Chicago Fed leader Michael Moskow appeared before an audience in Bloomington, Ill.
Guynn, who retires at the start of October after four decades at his bank, is a voting member of the rate setting Federal Open Market Committee. Moskow is not, but as all regional bank presidents attended FOMC meetings and participate in the debate, his views remain important.
Of the two addresses, bond markets, ever mindful of inflation, felt the deepest impact from Moskow's comments.
And it's not surprising. Moskow said "my assessment is that the risk of inflation remaining too high is greater than the risk of growth being too low." This enduring threat indicates "some additional firming of policy may yet be necessary to bring inflation back into the comfort zone within a reasonable period of time."
While Moskow's remarks were far from a promise to lift the Fed's overnight rate - it's currently at 5.25% - after central bankers left it steady at the beginning of August, conditions appear ripe to turn his warning into a reality. After all, while the most recent month's inflation data showed some welcome moderation, the arc of price pressures remains over the central bank's tolerance range.
Most analysts agree that it will take more time for a cooling economy and the impact of past rate hikes to bring inflation back in line. And even then, another round of surging energy prices, coupled with developments in housing rentals, could thwart that best-case forecast.
To be sure, the Atlanta Fed's Guynn was no shrinking violet. His speech, likely the last of his central bank career, centered on his warning of the dangers inflation presents to an economy, and on his assertion the Fed remains committed to keeping inflation in line. But his prescription for achieving this was a tad less aggressive than Moskow's.
"I'm comfortable with the notion policy seems to be, at the time of the last meeting, properly calibrated for my best forecast for the likely path for growth and inflation," Guynn said. But he added that as policy-makers move forward, economic conditions are "something we have to continue to assess, and if it turns out our view of where things are headed longer-term are different, then our policy prescription might be different."
The bank president offered that he expects that "over the medium term, inflation should begin to move back down" even as some data over the short term may still be unpleasant. And if upcoming data shows elevated inflation levels are more than the last gasps of the economy's once hot growth levels, the outlook for Fed policy will change accordingly.
"If I felt like inflation would move up and maybe even stay at current levels, rather than to move back down, I would be in the forefront of wanting to take additional policy action," Guynn said, as he called combating inflation the "cornerstone" of successful central bank policy.
Done Yet?
Collectively, the two Fed officials reminded financial markets that while most on Wall Street may believe the Fed is done raising interest rates, central bankers' decision to keep rate policy steady earlier this month may simply be a pause in the campaign.
Indeed, Fed Chairman Ben Bernanke has on several occasions attempted to caution markets that just because the Fed refrained from a rate actions at a given meeting, that lack of action implied little for what might happen at future meetings. Lehman Brothers economists, who are among a minority of banks that do believe the Fed will raise rates again, told clients "both Fed officials...were mildly on the hawkish side."
Moskow and Guynn also reminded markets that while all FOMC officials want price pressures clamped down, there's more of an internal Fed debate going on in regards to achieve this than may be apparent.
At the Aug. 8 gathering, Richmond Fed President Jeffrey Lacker was the sole dissenting vote in favor of raising rates. But many reckon that an understanding of the FOMC dynamics suggest Lacker's vote may have been a symbolic action. They argue Lacker likely represented the views of others who refrained from joining him, given the group's historical preference for presenting a unified face to markets.
And a debate would be a natural thing. Many Fed officials note the current period is a more challenging time for monetary policy. They expect cooling growth will help moderate inflation, but that leaves much of the rate outlook resting on a forecast that could prove faulty. Making things tougher, there's the risk that going too far with rates to spike inflation could cause an even bigger slowdown that policy makers want. |
