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To: Junkyardawg who wrote (52383)	6/11/2004 3:14:22 PM
From: Lazarus_Long	Read Replies (1) \| Respond to of 57110

Fed's Pianalto: Interest Rates Must Rise Friday June 11, 2:02 pm ET WASHINGTON (Reuters) - U.S. official interest rates are too low to be sustainable and the Federal Reserve must raise them to preserve price stability or risk losing credibility, a top Fed policymaker said on Friday. "I do know this -- the current federal funds rate, at 1 percent, is too low to be sustainable. Inflation expectations appear reasonably stable right now, but I am concerned about the potential for them to drift up in this environment," Cleveland Fed President Sandra Pianalto said in the text of a speech to the Pennsylvania Economic Association. "Preserving price stability will require the (Federal Open Market Committee (News - Websites) ) to increase the federal funds rate. Failure to respond in a timely fashion puts our hard-won credibility at risk," she added. Pianalto is a voting member this year of the Fed's policy-setting FOMC (News - Websites) , which meets on June 29 and 30 to review U.S. interest rates. Financial markets expect the Fed to raise interest rates by a quarter percentage point at the meeting, increasing borrowing costs for the first time in four years. "Broad-based price pressures have yet to emerge, and I am confident that the FOMC will act, as necessary, to preserve the hard-won gains it has already achieved," Pianalto said in the speech, a text of which was made available in Washington. She noted that a wide range of commodity prices have been rising steeply during the past year and that for the first time in a long while corporate executives have felt able to pass along some of the cost pressures to their consumers. "Prices of imported consumer goods have stopped falling and are now increasing. Against the backdrop of a depreciated dollar, it would not be surprising to see some further increases in imported goods prices," Pianalto said. She said that while energy price hikes have prompted concern, foreign producers appear to be taking steps to head off any further escalation in prices. "Nevertheless, if you believe that the economy's momentum has turned and strengthened appreciably, then you might logically conclude that inflation pressures are more likely than not to emerge as the expansion progresses, unless monetary policy adjusts," she said. The Fed, which slashed rates to a 1958 low of 1 percent in 13 steps that began in 2001 and ended last June, has said it expects to be able to be measured in removing such accommodative monetary policy. Pianalto noted that while futures contracts show markets expect the fed funds rate to move steadily toward 4 percent over the next two years, the FOMC "will determine the actual path for the federal funds rate on the basis of prevailing circumstances." She said she was "very encouraged" by the strong employment reports for March, April and May -- which showed the creation of nearly a million jobs -- and said rising manufacturing overtime hours and falling jobless claims indicate that job opportunities will expand along with the economy. "Lingering concerns about the economy's underlying strength may dissipate as the expansion continues, and the pace of hiring may intensify," Pianalto said. biz.yahoo.com