Fed official backs early rate hikes
Central bank cannot wait until economy stabilises as inflation is too high, says policymaker
MINNEAPOLIS - THE United States Federal Reserve should not wait for housing and financial markets to stabilise before it begins raising interest rates, said a central bank policymaker.
‘We’re pretty well-positioned for the downside risks we might encounter from here,’ Mr Gary Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview last Friday. ‘I worry a little bit more about the prospects for inflation.’
The comments by Mr Stern, a voter on the rate-setting Federal Open Market Committee (FOMC), reinforced traders’ forecasts for a rate increase by year end.
He indicated that Treasury Secretary Henry Paulson’s rescue plan for mortgage giants Fannie Mae and Freddie Mac would help to prevent a deeper housing and economic slump.
‘We can’t wait until we clearly observe the financial markets at normal, the economy growing robustly…before we reverse course,’ said Mr Stern, 63, the Fed’s longest-serving policymaker. ‘Our actions will affect the economy in the future, not at the moment.’
Traders’ estimates of a rate increase in October rose to 64 per cent from 58 per cent after his remarks were published.
Mr Stern compared the credit crunch to the one in the early 1990s, which restrained economic growth for almost three years.
He dissented three times in favour of raising rates in 1996. He is the only FOMC member to have served with three chairmen: Mr Paul Volcker, Mr Alan Greenspan and Mr Ben Bernanke. He became the Minneapolis Fed president in 1985.
His comments indicate that ‘the Fed has grown more uncomfortable with the inflation situation’, said Mr Tony Crescenzi, chief bond strategist at Miller Tabak in New York.
Mr Stern spoke two days after government figures showed that consumer prices had surged 5 per cent over the past year, the biggest jump since 1991. Excluding food and fuel, so-called core prices rose 2.4 per cent, higher than the 2.1 per cent average over the last five years.
‘Headline inflation is clearly too high,’ Mr Stern said, adding that he was concerned that would feed through to core prices and public expectations for inflation.
As long as energy and food costs level off, core inflation ought to slow over the next year, he added.
Crude oil has surged 73 per cent in the past 12 months, and rose to a record of US$147.27 a barrel on July 11. Worldwide, prices for food commodities such as wheat and rice were 43 per cent higher in April than a year earlier, according to the United Nations Food and Agriculture Organisation.
Mr Stern declined to say when policymakers may shift towards raising rates. ‘We’re going to want to, in my opinion, reverse some of those interest-rate reductions. I don’t think there’s any question about that. But exactly when depends on how things evolve from here.’
The FOMC last month halted a series of seven reductions that has taken the benchmark rate to 2 per cent, from 5.25 per cent in September last year.
Traders anticipate the Fed will boost its main rate at least a quarter percentage point from 2 per cent in October, after keeping borrowing costs unchanged in August and September. There is a 79 per cent probability of a move by year end, futures prices show.
BLOOMBERG NEWS
Source : Straits Times - 21 Jul 2008
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