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Inflation-wary Fed looks ahead to rate increases

(Agencies)
Updated: 2008-05-29 15:12

SAN FRANCISCO - Two Federal Reserve policy makers warned on Wednesday that interest rate increases might be needed before too long to curb inflation, even as the United States struggles with a weak economy.

The remarks solidified expectations that the Federal Open Market Committee has ended an aggressive rate-cutting campaign and could start to reverse its policy course late this year.

Federal Reserve Chairman Ben Bernanke watches the Washington Nationals versus Milwaukee Brewers baseball game at Nationals Park in Washington, Monday, May 26, 2008. [Agencies]

Dallas Fed President Richard Fisher and Minneapolis Fed President Gary Stern, both voting members of the FOMC in 2008, said they are keeping a close eye on inflation expectations being dialed into financial markets.

"If inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later," Fisher said in San Francisco.

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Rate increases could be made "even in the face of an anemic economic scenario," Fisher told the Commonwealth Club of California, adding that he did not expect a recession.

Fisher said it would be "unacceptable" for the Fed to be viewed as resigned to higher levels of inflation.

That is a particular risk as the lagged impact of the Fed's interest rate cuts starts to kick in, boosting economic growth at a time inflation is already "too high" and commodity prices are being pushed up by strong global demand.

Earlier, Stern vowed that the Fed would act in an "appropriate and timely" way.

"The key to maintaining low inflation and inflation expectations is likely to be the timeliness and magnitude of decisions we make to reverse course" on interest rates, Stern told a local business group in Altoona, Wisconsin.

SO FAR SO GOOD?

The Fed monitors inflation expectations as a test of what assumptions are priced into markets and, by implication, consumer behavior.

Central bank officials have expressed concern the United States may face early signs of stagflation, the damaging combination of weak growth and wage-price spiral that hit the world's biggest economy in the late 1970s and early 1980s.

Stern suggested the Fed had been able to hold the line.

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