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Reply With QuoteFed presidents offer cautionary tale
Top policymakers say they are keeping watch on inflation, ready to act if problems arise.
October 4, 2005: 6:17 PM EDT
Thanks guys it is greatly appreciated. Fishers comments today were very Greenspan-esque. "The inflation rate is near the upper end of the Fed's tolerance zone, and it shows little inclination to go in the other direction,"
Talk about a major one liner. The inflation rate is what keep the Fed rate on its measure pace. If inflation falls too low outside the Fed's 'tolerance zone' then we get a rate pause. If the inflation rate goes above this 'tolerance zone' then we get more frequent surprise hikes or larger moves up.
Remember once inflation is set into motion it it's difficult to slow down. You can't just halt inflation, or pause on rate hikes because you think the inflation rate is contained. The very definition of contained is not used property by the Fed as it makes people assume that inflation is locked in some kind of box were it's not doing any growing. But it is INFLATION. The very work means growth. When the Fed suggests inflation is contained it means that it is still growing but at the pace it finds acceptable. When inflation is in a healthy range of growth we will continue to get a measured pace of hikes.
Until we get a recession rate hikes will continues.
SEATTLE (Reuters) - The Federal Reserve is keeping a wary eye on inflation that is running at its maximum tolerable rate, and is prepared to take action if problems develop, two top Federal Reserve policy-makers said Tuesday.
The remarks from Dallas Federal Reserve Bank President Richard Fisher and St. Louis Fed bank president William Poole further underlined the central bank's apparent concern with inflation rather the chance of slower growth after hurricanes Katrina and Rita.
"The inflation rate is near the upper end of the Fed's tolerance zone, and it shows little inclination to go in the other direction," Fisher told the Greater Dallas Chamber of Commerce. He said hefty energy price rises were adding "demand pressures" to the economy that had to be watched.
Separately in Seattle, Poole said the U.S. central bank would be flexible if inflation risks become heightened and said financial markets, which have grown used to more transparency in policymaking, understand that is so.
"I have no doubt that both the FOMC (Federal Open Market Committee) and the market would respond to surprises in core inflation that seem likely to persist and to indicate a developing inflation problem," Poole said.
Fed more open
The Fed in 2003 introduced forward-looking language into its policy statements which accompany each FOMC meeting. Since then, the degree of surprise in markets to subsequent policy action has been muted.
"It is quite clear that the markets understand Fed policy to a much better extent than before," Poole said. "My own view is that the market's improved understanding, and the Fed's efforts to improve clarity of monetary policy decisions, has much to do with the economy's improved stability."
Over the past few weeks, a number of Fed officials have emphasized the central bank's determination to keep inflation under control, leading financial markets to believe the rate-rise cycle may not be as near an end as some had previously thought.
At its last policy meeting two weeks ago, the Fed raised the benchmark overnight lending rate by a quarter-percentage point to 3.75 percent. It was the 11th straight increase series of hikes that started in mid-2004, when the bank-to-bank rate stood at a 1958 low of 1 percent.
In a statement outlining its Sept. 20 decision, the Fed expressed concern Katrina could boost inflation pressures and said the hit to economic growth from the storm was likely to be fleeting. It also repeated its expectation that it could continue to push rates higher at a "measured" pace.
Narrow inflation target
Poole said the Fed wanted to keep so-called core inflation, which excludes volatile food and energy costs, within a fairly narrow range to prevent a threat to expansion.
"Our aim is to keep inflation, in general, down," Poole said. "If I had to pick a point, it is to keep these broad measures in a 1 to 2 percent range."
Poole is not a voting member of the policy-setting FOMC this year. He said markets had moved most on employment data, with investors evidently deciding that it "is a significant influence on the path of the intended funds rate", while inflation was generally ignored because it has not caused big surprises.
Fisher, who is a voter on the FOMC this year, told reporters after his formal address that policy-makers were keenly aware of the potential impact of heightened price pressures.
"We have to watch things very carefully here because there are inflationary pressures and ... (the Fed's) duty is to be especially vigilant on that front," Fisher said. "The question really is .... 'How much pricing power is there, or leeway to pass on prices?"'
He added that "clearly there is some pressure there and now we'll have to see how it manifests itself."
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Find this article at:
http://money.cnn.com/2005/10/04/news/economy/fed_fisher.reut/index.htm
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The Technician (escapades at times as Carnac)
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