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To: ild who wrote (67134)	7/31/2006 11:48:43 AM
From: shades	Respond to of 110194

Fed's Yellen: Funds Rate Currently 'Roughly Appropriate' . By Michael S. Derby DOW JONES NEWSWIRES SAN FRANCISCO (Dow Jones)--Federal Reserve Bank of San Francisco President Janet Yellen said Monday monetary policy appears near where it needs to be given a moderation in economic growth and the impact of past rate hikes, but added central bankers need to watch incoming data closely to determine where to head next with rates. "It appears to me that the federal funds rate currently lies in a vicinity that is roughly appropriate for the Fed to attain its key objectives over the medium run," Yellen said. But she added "since all such approaches are inherently imprecise, policy must be responsive to the data that actually emerges." Yellen said the data the Fed must watch is not limited to statistics on "inflation, output and employment" but should include "energy prices, the dollar, the stock market, long-term interest rates, housing prices and inflation expectations." Yellen was speaking before a group at the Golden Gate University in San Francisco. Her comments come amid considerable uncertainty about what the Fed's next move will be. Many in financial markets expect what is now a 5.25% overnight target rate will be maintained when policy makers next meet on Aug. 8, but many economists believe rising inflation pressure will likely drive the Fed to boost that key rate to 5.50%. Yellen is a voting member of the rate-setting Federal Open Market Committee. Yellen explained that a complicated mix of forces are currently confronting policy-makers, and that by some reckoning, it could easily be argued interest rates need to rise to keep inflation at bay. But she cautioned policy-makers must be mindful of what they've already done with interest rate hikes. "The need to incorporate lags between policy actions and effects on the economy is a key issue" and "we don't know what the lags are with precision, but we still need to do the best we can to take them into account," she said. Yellen added "we need to be forward-looking." As things now stand, the bank president said, "the recent news" on inflation "has been disappointing." She said that with the core personal consumption expenditures price index having risen by nearly 3% during the second quarter and implying a 2 1/4% gain since a year ago, it means price pressures are "somewhat above my 'comfort zone' - a range between one and two percent that I consider an appropriate long-run inflation objective for the Fed." The bank president noted that there are signs surging energy prices have bled into core prices, although inflation expectations have remained in check. The bank president said that she believes the fed funds rate should be "a bit above" a level that is neutral in regards to its impact on economic growth. "It is critical that core inflation trend in a downward direction over the medium term, and I think this is the most likely outcome" given that growth is moderating, she said. Other reasons to be optimistic over inflation include modest gains in labor compensation, strong productivity growth and businesses' room to absorb higher input prices, she said. Yellen called energy prices the "wild card" in the economic outlook. In terms of current conditions, "the economy now appears to have moved within a range of the full utilization of its resources" and excess slack "has most likely been eliminated," Yellen said. She noted the current unemployment rate suggests the economy is currently enjoying a state of "full employment." Still, referring to the rapid deceleration reported last week for second quarter U.S. economic growth, "my best guess is that growth will still be healthy but will remain somewhat below the sustainable rate as the year progresses," Yellen said. "We have already seen some cooling in the housing sector, and this brings me to another factor that is likely to restrain growth," which is "the significant moderation in the rate of house price appreciation," she said. Yellen noted that this process has occurred in an "orderly way." -By Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com (END) Dow Jones Newswires July 31, 2006 11:52 ET (15:52 GMT)