Fed official is gloomy on rates

Latest inflation data `require higher path'

May 19, 2006|By BLOOMBERG NEWS

NORFOLK, Va. -- The Federal Reserve is less likely to suspend its interest-rate increases after recent reports showed rising inflation, the president of the Federal Reserve Bank of Richmond, Va., said yesterday.

"The inflation outlook is at the borderline of acceptable and perhaps moving beyond," Jeffrey M. Lacker told reporters.

"Unfavorable inflation numbers and adverse movements in inflation expectations are going to require a higher path for real interest rates, and are going to make a pause less likely," Lacker said.

Minutes after Lacker spoke, a report released by the Federal Reserve Bank of Philadelphia showed that an index of prices paid by manufacturers for energy and other commodities rose to a seven-month high.

Lacker's comments are the first by a Federal Reserve official on monetary policy and the economy since the central bank said last week that further rate moves will depend on what data say about growth and prices.

Inflation this year is off to the worst start since 1990, a government report showed, growing at an annual rate of 5.1 percent in the first four months.

The Consumer Price Index rose 3.5 percent for the 12 months through April, the Commerce Department said yesterday. The so-called core rate of inflation, minus food and energy, rose 2.3 percent for the 12-month period.

"Lacker's reading the numbers at face value," said Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, N.J.

In Lacker's view, "No matter how much you want to take a nuanced approach, the whole point of a clear strategy is not nuance," Crandall said.

Separately, William Poole, head of the Federal Reserve Bank of St. Louis, said yesterday that he is going to wait for more economic reports before defining his position on monetary policy.

"I will reach that conclusion when I have all the data in hand," Poole told reporters in Philadelphia.

"That is what the market needed to hear," said John Roberts, managing director in charge of government bond trading at Barclays Capital Inc. in New York.

"You have seen a dramatic flattening across the yield curve" as longer-term bond yields fall, narrowing the difference with two-year notes, he added. Two-year notes are more sensitive to rate expectations.

In another development yesterday, Donald L. Kohn, a Federal Reserve Board governor, was nominated by the White House to be the board's vice chairman. Kohn has spent 36 years at the Fed and was Alan Greenspan's top strategist.

Lacker has never dissented in a vote at the Fed's rate-setting Open Market Committee since he became head of the Fed's Richmond bank in 2004. Poole doesn't vote this year.

"The Richmond Fed has traditionally had a very hawkish research and policy tradition," Crandall said. "They have also always taken plain speaking seriously."

The Fed has lifted borrowing costs a quarter point at every meeting since June 2004, bringing the key rate to 5 percent, the highest in more than four years.

The Open Market Committee is betting on a forecast of slowing growth and more temperate inflation as higher interest rates, rising energy costs, and a slowing housing market decelerate overall demand.

Federal Reserve Chairman Ben S. Beranke said after a speech in Chicago that, "It seems pretty clear now that the U.S. housing market is cooling."

Bernanke did not discuss the future course of interest rates in his speech or in his remarks afterward.

But he said: "Our assessment at this point ... is that this [slowing in the housing market] looks to be a very orderly and moderate kind of cooling."

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