The U.S. Federal Reserve must be
ready to take action if slowing economic growth fails to curb
inflation stemming from higher food and energy prices, two top
Fed policy-makers said on Tuesday, indicating that higher
interest rates may be needed.
Richard Fisher, president of the Dallas Fed, and Jeffrey
Lacker, president of the Richmond Fed, both of whom are known
for their hawkish stances on inflation, warned that vigilance
on price pressures is necessary even as oil prices have come
off their peaks.
"Until we have a clear sense of what will prevail, monetary
policy-makers must remain poised to act if slowing growth fails
to contain inflationary pressures," said Fisher said.
Fisher is a voting member of the policy-setting Federal
Open Market Committee this year and has dissented at every
meeting so far in favor either of higher rates, or of less
aggressive easing. He said is "very comfortable" with his a
reputation as one of the most anti-inflation Fed officials.
Lacker, who is not a FOMC voter this year but dissented
with the rate-setting group's majority decision in the past,
echoed some of Fisher's comment in an interview with Bloomberg
TV.
"Unless the python that is the U.S. economy can quickly
pass the recent burst of cost-push pressures, we risk a
reinforcing spreading of inflationary impulses and
expectations," Fisher told the Progress and Freedom Foundation
in Aspen, Colorado.
"Should this happen and the Fed were to fail to address it,
we would run the risk of losing the public's confidence in our
ability to constrain inflation," he said.
INFLATION SURGE
Earlier Tuesday, the Labor Department reported that U.S.
wholesale prices rose at the fastest annual rate in 27 years.
Producer prices in July were up 9.8 percent from a year ago,
the biggest increase since 1981, while prices excluding food
and energy were up 3.5 percent, the biggest rise since 1991.
Fisher welcomed the recent decline in oil prices and said
he was not surprised by the rise in the value of the dollar on
foreign exchanges markets. A stronger dollar helps blunt rising
import prices, but Fisher cautioned it was premature to
conclude the currency's rise would keep inflation at bay.
"It depends on how sustained it is. ... It is a question of
durability and I think it is too early to call," he told
reporters after the speech.
Lacker, on the other hand, had a more upbeat assessment on
inflation. "I expected overall inflation will moderate in the
coming months," he told Bloomberg TV.
The Fed halted its aggressive rate cutting campaign in June
after slashing its benchmark overnight fed funds rate 3.25
percentage points to 2 percent since mid-September to shield
the economy from a housing crisis and credit crunch.
The Fed's current target rate is very low and may not be
enough to deter prices from spiraling out of control, Fisher
told the audience during a question-and-answer session.
Lacker also warned that current rates are "awfully low,"
which can risk fanning inflation higher.
Fisher said the Fed had "done its job on the growth front,"
although he warned the economy would slow to a snail's pace in
the second half, if not grind completely to a halt, before a
recovery unfolds in 2009 to take it back to trend growth.
FED'S BALANCING ACT
Fisher, while wary about inflation, acknowledged the
housing and credit markets remained very fragile, subtly
reinforcing market expectations that the Fed will keep rates on
hold in the months ahead.
On the other hand, the Dallas Fed chief stressed that the
central bank would be able to raise interest rates to ward off
inflation without collapsing financial markets.
In addition to keeping rates steady, the Fed has continued
to lend a sizable portion of its Treasuries portfolio to banks
in a bid to keep funds flowing in the financial system. But he
maintained these liquidity measures are temporary and will end
"as soon as it is feasible."
While the banking sector has the public support from the
Fed, the same could not be said for Fannie Mae (FNM.N) and
Freddie Mac (FRE.N).
Fisher refused to comment when asked by reports about the
two struggling mortgage finance giants, whose shares have been
pummeled this week on renewed worries about their ability to
raise capital in the face of rising mortgage losses.
Lacker was more pointed in his view about their fate. He
said he preferred to see them "credibly and demonstrably
privatized."
(Additional reporting by Glenn Somerville and Richard
Leong)
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