Fed hawks Lacker, Fisher warn on inflation

CHARLOTTE, North Carolina Thu Apr 17, 2008 7:21pm EDT

U.S. dollar bills are displayed in Toronto in this posed photo, March 26, 2008. REUTERS/Mark Blinch

U.S. dollar bills are displayed in Toronto in this posed photo, March 26, 2008.

Credit: Reuters/Mark Blinch

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CHARLOTTE, North Carolina (Reuters) - Two top Federal Reserve officials warned on Thursday against the risks of inflation, in remarks that underscored the existence of a hard wing of policy-makers who oppose further interest rate cuts.

Both Richmond Federal Reserve President Jeffrey Lacker and Richard Fisher, president of the Dallas Fed, in separate speeches cited the dangers of delaying moves to rein in inflation.

Fisher is a voting member of the Fed's policy-setting committee this and in March cast one of two dissenting votes against a decision to cut interest rates by three-quarters of a percentage point. Lacker, who has taken hawkish stances previously on inflation, is not a voter on the policy committee this year.

"Inflation is a problem now. It is too high and personally I would be uncomfortable in just waiting for economic slack to bring it down," Lacker told reporters on the sidelines of a symposium here.

The Fed has slashed rates by 3 percentage points since September after rising defaults among U.S. subprime mortgages sparked global financial market turmoil and chilled growth.

Fed Vice Chairman Donald Kohn spoke earlier in the day at the credit market conference here, which is being sponsored by the Richmond Fed. He noted that the credit crunch was hobbling growth, and this was intensifying the risks faced by the economy, but he did not speak more broadly about the outlook.

Lacker said economic activity would probably shrink in the first half of the year, although he pointedly declined to say if this performance would add up to a recession. But he was more concerned about the impact of persistent price pressures.

"I am particularly concerned about recent movements in measures of expected inflation," he said. "A deterioration of inflation psychology is a major concern because it is very difficult to unwind."

His remarks were echoed by Dallas Fed chief Fisher in a separate speech to the Chicago Council on Global Affairs.

"I have maintained a strong reluctance to further general monetary accommodation," Fisher said.

"The answer...is not to compound the bad by repeating the oft-prescribed remedy of inflating our way out of our predicament with a wing-and-a-prayer promise that it can always be reined in later," he said.

Fisher has dissented twice against rate cuts voted on by the Federal Open Market Committee. Both Fisher and Philadelphia Fed chief Charles Plosser on March 18 opposed the rest of the committee on a 75 basis point cut.

Investors think the Fed will cut rates by at least another quarter percentage point at its next scheduled policy meeting, on April 29-30, but there is a sense that high inflation will prevent it from going much further.

"Looking at our record over the last four years of inflation that has fluctuated between just below 2 percent and (above) 3-1/2 percent, the danger in that pattern persisting is that people might become accustomed to it, and come to expect inflation to continue at rates greater than we would like to see," said Lacker.

Lacker dissented repeatedly in 2006 in favor of higher interest rates after the Fed halted its policy-tightening campaign.

Soaring energy and food prices pushed the U.S. March consumer price index up 0.3 percent from the previous month, and up 4 percent versus a year ago. Core consumer prices, which strip out volatile energy and food costs, rose 0.2 percent on the month and are up 2.4 percent from a year ago.

The Fed expects inflation will moderate thanks to growing slack in the slowing U.S. economy, but he was not so sure.

"I am uncertain about the extent to which it will moderate. I think there is a chance it will. I think there is a chance it won't," he said.

(Additional reporting by Ros Krasny in Chicago and Glenn Somerville in Washington; Editing by Leslie Adler)