Fed’s Fisher: Inflation greatest risk to US
Wed Aug 16, 2006 3:46 PM ET
By Ros Krasny
DALLAS (Reuters) – Inflation is still the greatest risk to the U.S. economy, and policy-makers will not hesitate to raise interest rates again if incoming data shows it is necessary, Dallas Federal Reserve Bank President Richard Fisher said on Wednesday.
“There is a definite increase in inflationary momentum,” Fisher said at a luncheon by a commercial real estate group. “The Federal Reserve will not tolerate inflation,” he added, terming it the Lex Luthor to the “Superman” United States economy, referring to the superhero’s nemesis.
Inflation “is a sinister force that has the capacity to charm and romance the heck out of you, but in the end wreaks only havoc,” he said.
Fisher is the first Fed policy-maker to speak publicly since the Federal Open Market Committee voted this month to hold U.S. benchmark interest rates steady at 5.25 percent. He is not an FOMC voting member in 2006.
The Fed’s decision, taken with a single dissenting vote, paused a string of rate hikes made at 17 consecutive meetings over more than two years.
Financial markets are split on whether the Fed will resume its tightening cycle; futures show just a 25 percent chance of a September rate increase, but higher prospects for a Fed move in October or later.
Chances for Fed rate moves have slipped this week after July’s core producer and consumer price data came in below Wall Street expectations, suggesting the Fed’s forecasts for inflation to moderate may be playing out.
The U.S. economy typically slows before inflation comes down, Fisher noted. But assessments that the Fed is either done raising rates, or is already preparing to raise again, are mere guesses, he said.
SENSES WORKING OVERTIME
Fisher said the Fed “will watch and listen and ‘taste’ the indicators as they come in,” stay dependent on both statistical and anecdotal data, and continue to monitor the lag between its policy actions and their effect on the economy.
“I expect the 17 consecutive (Fed) actions have begun to take their effect … but I don’t know any great precision how long it will take or how long of an impact there will be,” Fisher told reporters.
At their core, central bankers worry most about inflation, “the enemy of sustainable growth,” he said.
“If we see, after this pause, that inflation is beginning to threaten economic prosperity, we will take deliberate … measures to counter it,” he said. Even so, “that doesn’t mean we need to take a sledgehammer to the economy.”
Price inflation does not typically become entrenched unless accompanied by wage inflation, Fisher said.
“Conversations with CEOs and other business operators all indicate an emerging and widening shortage of skilled and semiskilled workers, along with attendant upward wage pressures.”
Fisher later told reporters that a slower economy should start to tamp down wage pressures somewhat, but the economy has been running near full employment at a jobless rate that fell as low as 4.6 percent in June before rising to 4.8 percent in July.
More companies are reporting the ability to raise prices with less customer resistance, he said.
Energy prices are a factor. Some Dallas-area restaurants, for example, have seen energy prices spike by 40 percent this year, Fisher said.
“It becomes an inflation driver when you have pass-through” from headline prices to core prices, he said.
RECESSION NOT ON HORIZON
Fisher said U.S. gross domestic product growth for the second quarter was likely to be revised closer to 3 percent from its initial print of 2.5 percent, and third-quarter growth could be similar. “Recession is not visible on the horizon,” he added.
Still, the U.S. housing market is in the midst of a correction notable for its “suddenness and depth,” he said. That, along with high energy prices and higher interest rates, was “definitely having an impact on the consumer.”
Fisher spoke at length about the impact of globalization in blurring the usual lag between Fed policy actions and their impact on the economy.
The lags “may become longer, increasing the time it takes for the consequences of Fed tightening measures to take hold,” he said.
