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Inflation-wary Fed looks ahead to rate increases

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

"Inflation expectations have remained reasonably well anchored so far, which is encouraging," he said.

Headline inflation, which includes food and energy prices, "is clearly too rapid for comfort," he said, adding that core measures "have been better behaved."

The Fed lowered its federal funds rate to 2.0 percent in April, the latest in a string of cuts started in mid-September, when the rate was at 5.25 percent, to shield the US economy from the fallout of a housing and credit crisis.

Fisher has been one of the Fed's most vocal policy hawks this year, and on Wednesday termed inflation "a sinister beast" and the "enemy of capitalism."

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He has tallied three straight dissents against the FOMC's decisions to lower interest rates.

"Growth cannot be sustained if markets are undermined by inflation," Fisher said. "Stable prices go hand in hand with achieving sustainable economic growth."

But Stern said the Fed was still walking a policy tightrope given the combination of weak growth and rising inflation pressures, that demands delicate action.

"We are seeing challenges on both sides of that (dual mandate) and I think we are simply going to have to navigate the minefield," he said.

In particular, Stern said it was unclear if federal tax rebate checks now being mailed to millions of Americans would have an impact beyond one or two quarters.

Some forecasters fear that the United States faces a "double-dip" slowdown, with growth likely to pick up in the next few quarters on the back of the stimulus package, before fading again in late 2008 or early 2009.

Fisher said figures like Wednesday's stronger-than-expected April durable goods orders, while hard to view in isolation, were a sign that the most disastrous outcomes predicted for the economy have not played out.

"We'll have anemic growth for a while, but to me, inflation is the bigger risk," he said.

ANOTHER ONE BITES THE DUST

Separately, the FOMC will lose a voter with the departure of Frederic Mishkin, effective August 31.

The Fed's usual line-up of seven governors, including the chairman and vice chairman, will dwindle to four because of two vacancies that have been unfilled for months.

"This will mean the departure of an influential dove," said David Sloan, analyst at 4CAST Ltd in New York.

Mishkin, seen as an ally to Fed Chairman Ben Bernanke in his support of formal inflation targets, will return to his teaching post at Columbia University's Graduate School of Business.

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