Interest rates heading up. :) (story appeared 3 hours ago)
WASHINGTON (Reuters) - Federal Reserve Governor Laurence Meyer said Wednesday the U.S. central bank needed to review whether interest rates should remain as low as they are in view of the economy's strength and tight labor markets.
Meyer, known as one of the central bank's most zealous inflation fighters, told an economic conference the Fed needed to reassess last year's three rate cuts since keeping monetary conditions too easy would risk unleashing inflation pressures.
''The question that has to be confronted is whether such an accommodative policy remains appropriate, going forward,'' he told the meeting, sponsored by the World Economic Forum and the U.S. Chamber of Commerce.
Meyer applauded the economy's stellar performance over recent years, but cautioned that much of it had resulted from one-off factors -- such as lower oil prices or the stronger dollar that had helped to hold down the price of imports.
''Some combination of temporary but nevertheless persistent favorable supply shocks and perhaps more permanent supply-enhancing structural changes have prevented the pickup in inflation that otherwise would have been expected from persistently robust demand and unusually high and rising labor utilization rates,'' he said.
But combined with tight labor markets where wages and costs faced clear upward pressure, the disappearance of many of those special factors could herald an uptick in inflation somewhere down the road, Meyer warned.
''The challenge for monetary policy, to the extent recent U.S. performance has been driven by temporary supply shocks, is to facilitate a transition from the current exceptional but unsustainable state, to a less exceptional but more sustainable one,'' Meyer said.
Reflecting his preference for pre-emptive strikes against inflation before it shows up in headline numbers, Meyer added the Fed had to act ''prior to the supply shocks dissipating or inflation increasing by an unacceptable amount.''
The Fed cut the benchmark federal funds overnight lending rate by a total of three-quarters of a percentage point to 4.75 percent last year in a bid to shield the economy from the fallout of a financial crisis wreaking havoc across the globe.
But while most analysts expect the economy to have slowed from a red-hot growth rate of 6.1 percent recorded in the last quarter of 1998, the anticipated slowdown has yet to show up in official data. Consumer spending has remained strong, and U.S. stock prices have continued to climb to ever higher levels.
As Meyer was speaking, the Dow Jones industrial average racked up yet another record close, finishing the day at 10,411.66 points. Strong gains in U.S. stocks have driven much of the consumer demand fueling growth in the world's biggest economy.
Meyer's rate warning reflected that of Fed Chairman Alan Greenspan, who as early as February warned that policymakers may have to reassess last year's rate cuts. He indicated that the Fed was in no rush to move in either way soon, though.
Fed policymakers meet on May 18 to deliberate their next monetary policy moves. Few in financial markets at this point expect them to change tack on interest rates, particularly since most Fed officials over recent weeks have indicated they want to keep their options open for now.
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