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Fed official signals concern over inflation risks

Dallas Federal Reserve Bank President Richard Fisher said Tuesday inflation was nearing the high end of the Fed’s comfort zone — a clear signal that the Fed will continue raising interest rates.
/ Source: Reuters

Dallas Federal Reserve Bank President Richard Fisher said Tuesday the U.S. central bank needed to be vigilant on inflation and warned a loose fiscal policy risked pushing interest rates higher.

“The inflation rate is near the upper end of the Fed’s tolerance zone, and it shows little inclination to go in the other direction,” Fisher told a luncheon sponsored by the Greater Dallas Chamber of Commerce.

His remarks marked the latest in a series of comments from Fed officials signaling concern over inflation risks.

Fisher, who is among the voters this year on the central bank’s rate-setting panel, told reporters after his speech the Fed had to keep a keen eye on inflation given heightened price pressures. He also expressed confidence in the economy’s resilience.

“We have to watch things very carefully here because there are inflationary pressures and ... (the Fed’s) duty is to be especially vigilant on that front,” Fisher said. “The question really is .... ’how much pricing power is there?”’ he said, referring to the ability of businesses to raise prices.

“We’ll have to watch the data and listen to the anecdotal evidence very carefully. But clearly there is some pressure there and now we’ll have to see how it manifests itself.”

Fisher’s comments made prices for U.S. Treasury debt slip back, as investors read them as one more sign the Fed was likely to keep pushing interest rates higher. Stock prices, down earlier, continued their descent.

The Dallas Fed chief said the economy appeared to have been slowing, and much of the Fed’s monetary stimulus had been removed, before hurricanes Katrina and Rita hit.

He said, however, that soaring energy prices and heavy government spending in the wake of the two storms were adding ”demand pressures” to the economy.

“The markets, if left to their own devices, would produce higher interest rates to ration money and balance the demand and supply of capital,” he said. “If the Federal Reserve were to resist the upward pressure on interest rates, it would in effect monetize the burgeoning fiscal deficits.”

At its last policy meeting two weeks ago, the Fed raised the benchmark overnight lending rate by a quarter-percentage point to 3.75 percent. It was the 11th straight increase in a rate-rise campaign that started in June 2004, when the bank-to-bank rate stood at a 1958 low of 1 percent.

In a statement outlining its Sept. 20 decision, the Fed expressed concern Katrina could boost inflation pressures and said the storm’s economic impact was likely to be fleeting. It also repeated its expectation that it could continue to push rates higher at a “measured” pace.

Fisher said data provided a “less than clear picture”  in the wake of the storms, leaving the Fed to rely much more on anecdotal information in conducting monetary policy.

He said the Dallas Fed’s contacts had heard anecdotal information suggesting the pace of the U.S. expansion had begun to slow slightly before Katrina slammed into the Gulf Coast on Aug. 29, followed by Rita on Sept. 24.

Fisher said higher energy prices had been weighing on growth even before Katrina struck, saying recent data had confirmed a slowing trend.

In addition, he said, “Much of the Federal Reserve’s monetary policy accommodation had been removed.”

But he said in a global economy where capital can move quickly from one spot to another, it was important for U.S. policymakers to safeguard the dollar.

“Business is risky enough without the additional uncertainty created when a nation’s unit of account -- in plain language, its money -- is undermined,” Fisher said.

He said raising taxes or allowing monetary policy to accommodate growing budget deficits could lead to some capital flight.

“So this leaves a third option: better calibrating  government spending programs,” Fisher said.

“If the United States is to remain an economic colossus, its fiscal authorities, like its central bankers, will have to become models of restraint,” he said.