Federal Reserve Governors Thursday hinted that the central bank might be close to the end of its extended program of interest rate hikes, although not at the expense of allowing an unwanted rise in inflation.
Governor Susan Bies told reporters after a speech to business leaders in Los Angeles that the Fed is getting closer to calling a halt to its string of interest-rate hikes.
"We're closer (to neutral) than we were a few months ago," she said. Neutral rates are those that neither stimulate nor stymie economic activity.
Bies's comments were echoed by Governor Mark Olson who, speaking at the University of Arkansas in Little Rock, said the Fed has reached a point in monetary policy it had previously identified as neutral.
But he said it was impossible to know whether policy was indeed neutral, and that theoretically conditions could exist for the Fed to go beyond neutral.
At the Fed's March meeting "we did indicate that some additional tightening may be required, but we also were quite careful to say that would be dependent on the information that comes in," Olson said.
Indeed, because there is a delay between implementation of rate hikes and their impact on the economy, the Fed needs to be aware of the potential for "overshooting," Gov. Donald Kohn said in Oklahoma City after a speech to business leaders.
"Overshooting is one of the things we are very aware of as a risk in policy today," Kohn said, noting that it was not good enough to just "look out the window" at current conditions.
The economy was an "extremely interesting juncture," Kohn said, adding that he did not know how much policy firming will be needed to accomplish the Fed's objective of sustainable growth and low inflation.
Since June 2004, the Federal Open Market Committee has raised interest rates 15 times by a quarter of a percentage point each, bringing the bellwether federal funds rate to its current 4.75 percent from 1.0 percent.
On balance, financial markets are expecting two more rises, which would carry the benchmark funds rate to 5.25 percent.
Kohn, seen as a possible contender to succeed Roger Ferguson as vice chairman of the Fed, said the hikes had so far achieved the central bank's goal of sustainable non-inflationary growth.
The FOMC is aware of the dangers inflation poses, and was weighing information "meeting by meeting," he said.
Kohn said U.S. housing markets are likely to feel the first effects of interest-rate rises and cited signs that home markets are starting to slow, adding that this could weigh on consumer spending.
Still, he said: "At this time, even with housing markets cooling, the fundamentals remain favorable for solid gains over the coming months and quarters in both consumer spending and business investment."
Bies gave a ringing endorsement to the U.S. economy along with the state of Corporate America.
"When you look at it, this economy is about as good as it gets," she said. "Things are very, very good ... employment is growing very robustly."
Some pundits have looked at that robust jobs growth and falling unemployment rate, now at a 4 1/2-year low, as a possible trigger to wage inflation.
Even so, "we have seen few signs of upward pressure on labor compensation," Olson said.
Kohn added that although U.S. unemployment and industrial capacity use rates were at levels historically linked with rising inflation, the past was not always a perfect guide.
He said he would not be surprised to see wages pick up as labor markets tighten but said that did not necessarily need to feed inflation since productivity, or hourly output per worker, has been growing.
Kohn said he expects the pace of economic growth to moderate in the coming months but that forecasting is difficult right now because some of the economy's many moving parts, particularly housing, "look like they are in transition."
Policy-makers need "not just to look out the window but to see what's going to happen in the future" and try to discern early signs growth may be slowing or inflation may be picking up, he said.
"We are at an especially interesting juncture," Kohn said.
If his overall expectations pan out and the economy slows, Kohn said, inflation should remain roughly stable.
But strength in demand and a "narrowing margin" of slack in the economy meant he was "focused on making sure that inflation and inflation expectations remain well anchored."
Above all, Kohn said the Fed must be prepared for all outcomes, including the possibility that the economy does not moderate as expected, raising the odds of higher inflation.
Olson and Kohn said the economy has been holding up well in the face of high energy prices, which have pinched disposable income for many Americans. Crude oil futures this week have risen back toward record highs set in September in the wake of Hurricane Katrina.
If oil prices "flatten" at around $70 per barrel -- a few years ago, an unheard-of level -- "the drag on real income and spending from rising energy costs should diminish over time, as should the risk of additional energy cost pressure on underlying, or core, inflation," Olson said.
(Additional reporting by Glenn Somerville and Andrea Hopkins in Washington and Lisa Baertlein in Los Angeles)