Inflation threat keeps Fed in check

SAN DIEGO/LOS ANGELES Wed May 2, 2012 10:22am EDT

File photo of Richard Fisher, president of the Federal Reserve Bank of Dallas, at the 2009 Albert H. Gordon Lecture on February 23, 2009. REUTERS/Brian Snyder

File photo of Richard Fisher, president of the Federal Reserve Bank of Dallas, at the 2009 Albert H. Gordon Lecture on February 23, 2009.

Credit: Reuters/Brian Snyder

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SAN DIEGO/LOS ANGELES (Reuters) - The risk of inflation is keeping the Federal Reserve from doing more to support the U.S. economy, according to comments from several top Fed officials that reinforced the notion the central bank is happy to stand pat for now.

Five policymakers weighed in on Tuesday on how the U.S. central bank intends to deal with possible threats to the economic recovery. They include volatile oil prices, Europe's debt troubles, and a looming "fiscal cliff" of scheduled U.S. tax increases and spending cuts.

With inflation very close to the Fed's target of 2 percent, the officials seemed hesitant to rock the boat with more bond buying - even though unemployment remains high at 8.2 percent.

Atlanta Fed President Dennis Lockhart said inflation can run "a bit" above the Fed's 2-percent target, but he would be concerned if it ran at 3 percent or higher, and policymakers should aim for the rate to gravitate back toward that target.

"As a practical matter, running higher inflation ... I just don't see happening. Not intentionally," said Lockhart, a voter this year on the Fed's policy-setting panel, in comments at the 2012 Milken Institute Global Conference in Beverly Hills, California.

"In my mind," he added, "the inflation target is always something that you're always trying to gravitate toward."

In January, the Fed took the historic step of formally setting an inflation target of 2 percent. At the same time, it made a conditional pledge to keep interest rates "exceptionally low" until at least the end of 2014 - a statement it repeated last week to help revive an economy slow to recover from recession.

Inflation is running very close to the new target. Headline inflation receded to a rate of 2.1 percent in March, though core inflation has risen slightly in the last several months.

Philadelphia Fed President Charles Plosser, speaking at a separate conference in San Diego, warned that letting inflation rise could undermine the Fed's credibility, and would be unlikely to boost employment anyway.

"Credibility is very fragile, things can happen that you can lose it very quickly," said Plosser, who does not have a policy vote this year. "The public has a right to expect the central bank to keep inflation near its target of 2 percent over the medium term."


Chicago Fed President Charles Evans, opposite Plosser on the Fed's philosophical spectrum of policymakers, urged an inflation "cushion" up to 3 percent that would let policymakers help the economic recovery along and cut the unemployment rate, which in March was still high at 8.2 percent.

The Fed has a "tremendous" amount of room to ease policy more, in part because the United States is not likely to see a "burst" of inflation, said Evans, a policy dove who has long endorsed more bond buys.

In late 2008 the Fed slashed interest rates to near zero and it has bought $2.3 trillion in long-term securities in an unprecedented drive to spur growth and revive the economy after the worst recession in decades.

But the U.S. recovery, especially in jobs, has been slow and economic growth has been erratic. Still, when the Fed launched its second round of bond buying in late 2010, officials had been worried about deflation. That is no longer the case.

Last week, the central bank slightly raised its inflation forecasts through the end of 2014, a move some took to mean it was less inclined to embark on a third round of bond buys, known as quantitative easing (QE3).

The Fed may need QE3 if the jobless rate gets "stuck" at around 8 percent or inflation drops well below 2 percent, San Francisco Fed President John Williams said at the Milken conference.

But Williams, who has a vote on the Fed's policy-setting panel this year, made it clear he does not expect the economy to underperform in such a way. He added that the Fed would "take the punch bowl away" if inflation picks up above 2 percent in a sustained way.

Jeffrey Lacker, head of the Atlanta Fed, speaking in Washington, warned the further easing would only raise inflation pressures and not do much for economic growth.

(Reporting by Ann Saphir in San Diego, Tim Reid in Los Angeles and Jonathan Spicer in New York; Writing by Jonathan Spicer; Editing by James Dalgleish, Jeffrey Benkoe, Jan Paschal, Andrew Hay)

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Comments (3)
lally2301 wrote:
A recession is already installed in UK, and some European countries in the same situation such Portugal, Ireland, Italy, Greece, Spain (PIIGS. What about USA? I am pretty sure that a deep recession will show up in USA in 2013 and then a DEPRESSION with HYPERINFLATION around 2014-2015 and it might last for another 10 more years like in 1929-1939. However, just 5% of the population will become wealthy because they will be prepared in advance. Who knows if I’m right.”. HOW? Where is the money? Get more Financial Education is the MAIN KEY.

May 02, 2012 12:01pm EDT  --  Report as abuse
minipaws wrote:
No, the fact that we are all moving to credit unions where we actually get paid interest on our savings is keeping the fed in check. IOUSA!

May 03, 2012 9:35am EDT  --  Report as abuse
lally2301 wrote:
I truly believe that FINANCIAL EDUCATION is the key for all kinds of financial challenges, including Recession and Depression. The economy does not dictate your financial circumstances. As somebody said. “Thank You Economy” because he knows how to find great deals. Anybody can get started reading book from successful people and investors; and with all my respect NOT from financial planners or Bank CEOs, who tell you how to deposit your money for the long-term. The best way to protect yourself is to learn how to set up your own business as 1) Create a Business; 2) Invest in Real Estate; 3) Buy smart stocks from savy investors, and not from Wall Street or similar ones; and 4) Invest in Commodities. HOW can you achieve that? FINANCIAL EDUCATION is the main key. 2013 will be the year for global recession to a Global Depression in 2014-2015 and last for 8 to 10 more years. Hope is OK but TAKING ACTION change reality. The best for all of you.

May 08, 2012 6:40pm EDT  --  Report as abuse
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