Fed's Poole: Inflation Expectations Very Well Controlled
>>>Poole: "I wouldn't like to write rules that make lenders skittish," See the highlights. He is giving himslef plenty of room to raise rates/squash the mortgage banks, despite the headline about inflation being under control.<<<
DOW JONES NEWSWIRES
February 9, 2007 12:32 p.m.
ST. LOUIS (Dow Jones)--Inflation expectations have been well managed by the Federal Reserve, notwithstanding some short-lived tremors from shifts in oil prices, St. Louis Federal Reserve President William Poole said Friday.
"We're in a good situation, inflation expectations are well-controlled and that's going to dominate the outcome" of Fed policy-making, Poole told reporters in a briefing following his address an AAIM management association breakfast.
He conceded that "there have been some short-run fluctuations...related to changes in oil prices," but added that the Federal Reserve's decision-making is based on "longer run fundamentals."
He reiterated that the Fed funds rate is currently "well positioned."
In his earlier speech on "The State of the American Economy," Poole noted that his preference for inflation, as measured by core personal consumption expenditure - which strips out the volatile effects of energy and food prices - would be a rate of 1.5%, "plus or minus half."
Poole, who is on the voting panel of the Federal Reserve this year, again raised the prospect that the Fed's target rate could remain steady at 5.25% for some time to come, if growth remains on the expected path of 3%, and inflation continues to moderate.
"If that comes to pass," he said, the current target rate could be judged as "neutral."
Nevertheless, Poole reiterated he would be ready to raise rates again to curb a rebound in inflation.
"I'm prepared to lean on the side of raising rates to make sure that inflation comes back convincingly in the 1-2% range [for core PCE]," he said.
The Fed again elected to keep the rate unchanged at its last meeting Jan. 31, though the wording of its policy statement included new references to "tentative signs of stabilization" in the housing market and modest improvement in readings on core inflation.
Bolstering the case for an extended pause on interest rates, Poole stressed that the bank would resist hasty action on data surprises.
"We have the luxury of waiting to be sure that we understand what's going on...and that any fluctuations we see aren't just noise in the data, Poole said.
"The Fed doesn't have to be out front in responding to incoming data," he said. On this subject, Poole returned to his often-stated observation that last year, the market brought longer-term Treasury yields lower of its own accord, obviating the need for action from the central bank to ease pressure on the housing market.
Turning to the recent troubles in the mortgage market, which has seen an increase in foreclosures and claimed a number of subprime lenders, Poole said he didn't see any great threat to the economy from such disturbances.
Moreover, he said he would be reluctant to propose rules on lending.
"I wouldn't like to write rules that make lenders skittish," Poole said. He said the central bank's role was to ensure that the top regulated banks have sufficient liquidity to manage their liabilities. He pointed out that predatory lending practices by lower-tier, unregulated banks had caused many of the current problems.
In a question-and-answer session with the breakfast audience, Poole said, "What I think happened to excess was many companies made loans that were poorly documented and now those are coming home to roost." But he stressed that the recent spate of payment difficulties among mortgagees had no basis in the current economic climate, insofar as it was "not caused by employment" issues.
"Having said all that, the development of a subprime market is a very healthy thing," Poole said in the audience question and answer session, in that it makes mortgage credit more accessible to "people who've been beyond the fringes of the financial markets."
Poole didn't express concerns about the U.S. current account imbalance. In comments to the breakfast audience, he said that as long as the U.S. continues to offer a good rate of return on investment and a sound economy, it will remain an attractive destination for foreign inflows.
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