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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (46218)	2/10/2006 10:58:46 AM
From: CalculatedRisk	Read Replies (2) \| Respond to of 116555

Moskow Says Rates May Need to Rise to Stem Inflation bloomberg.com Feb. 9 (Bloomberg) -- The Federal Reserve may need to keep raising the benchmark U.S. interest rate to prevent inflation from accelerating, Chicago Fed Bank President Michael Moskow said. ``There are risks to the inflation outlook -- namely, the potential for energy cost pass-through, pressures from increases in resource utilization, or rising inflationary expectations,'' Moskow said in a speech to the Risk Management Association of Chicago. ``If inflation or inflation expectations were to rise persistently, then policy clearly would have to be tightened further.'' The Fed raised the overnight bank lending rate by a quarter percentage point to 4.5 percent on Jan. 31, saying ``some further policy firming may be needed'' to keep inflation and growth in balance. The central bank has raised its main rate at its past 14 meetings, pushing the target up 3 1/2 percentage points. While Moskow said he's unsure if more rate increases are needed now that the benchmark is in a ``neutral range'' that neither spurs nor restrains growth, he said the January jobless rate of 4.7 percent means inflation pressures may build as the economy expands. ``The economy is operating close to potential,'' he said. ``We need to carefully monitor for the emergence of any economy-wide resource pressures.'' Moskow, 68, is a non-voting member of the policy-setting Federal Open Market Committee this year. He will be a voter again in 2007. He's headed the Chicago Fed bank since 1994. Decisions about future changes will depend on incoming information on the economy, Moskow said. If economic growth stalls as the housing market slows, the Fed may even have to reduce rates, he said. Rate Outlook ``The next policy decision is much less certain now than it was when rates were clearly well below neutral,'' Moskow said. Inflation is currently ``relatively low'' and is likely to remain ``contained'' with appropriate Fed rate policy, he said. Still, Moskow spent much of his speech discussing the risks to inflation, not the threats to economic growth. He said relatively little slack remains in the labor market, though some slack remains in manufacturing. Capacity utilization, a measure of how busy factories are, rose in December to the highest since November 2000. The Fed's preferred inflation measure, the personal consumption expenditures price index minus food and energy, rose at an annual rate of 2.2 percent in the fourth quarter, exceeding Fed Chairman Ben S. Bernanke's 1 percent to 2 percent range for acceptable inflation. Core Inflation So-called core inflation will be a ``bit higher'' in 2006 as companies pass along last year's jump in energy and raw materials costs to consumers, Moskow told reporters after the speech. Overall inflation will probably be ``slightly lower'' because commodity prices are unlikely to keep surging, he said. ``Nonetheless, for most of the past year core PCE inflation has been running close to 2 percent, which is about the upper end of the range that I feel is consistent with price stability,'' he said. ``Even with the funds rate in the range of neutral, further changes in policy may be appropriate.'' Moskow said the U.S. economy's 1.1 percent expansion in the final three months of 2005 was ``surprisingly weak'' because of temporary factors such as a drop in government spending, a jump in imports and a slowdown in auto sales. ``Looking beyond the near-term fluctuations, I'd say that the outlook is good,'' he said. A forecast for economic growth of about 3.25 percent over the next two years is ``reasonable.'' ``The most recent indicators are pretty positive,'' he said, citing rising orders for capital equipment, a strong labor market and solid increases in consumer spending. ``Growth in output is rebounding from the low fourth-quarter number.''