Two Fed policy makers warn about potential inflation

MADISON, Wis./KANSAS CITY Thu Jan 10, 2013 5:26pm EST

President and CEO of the Federal Reserve Bank of St. Louis James Bullard gestures during an interview at the Federal Reserve Bank of St. Louis June 8, 2011. REUTERS/Peter Newcomb

President and CEO of the Federal Reserve Bank of St. Louis James Bullard gestures during an interview at the Federal Reserve Bank of St. Louis June 8, 2011.

Credit: Reuters/Peter Newcomb

MADISON, Wis./KANSAS CITY (Reuters) - Two top Federal Reserve policymakers expressed discomfort on Thursday with the U.S. central bank's easy monetary policy, suggesting Fed Chairman Ben Bernanke may face more dissent this year.

In remarks that stamped her as a hawk on the Fed's policy-setting committee, Kansas City Federal Reserve President Esther George warned that the Fed's near zero interest-rate policy - aimed at boosting the economy - could spark inflation.

"A prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the 2 percent inflation goal in the future," she said in her most extensive remarks in a year on policy.

"Monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it," she said.

George this month will cast her first vote on monetary policy since taking the helm at the Kansas City Fed in October 2011.

"The latest remarks from Kansas City Fed's Esther George have cemented the presence of a hawkish dissenter on the FOMC in 2013, with Richmond Fed's Lacker passing along the hawkish torch," said Gennadiy Goldberg, U.S. strategist at TD Securities.

Lacker was the lone dissenter on the Fed's policy-setting panel last year.

St. Louis Fed President James Bullard, who also votes this year on U.S. monetary policy, also warned about the potential for inflation, although he noted that so far inflation is running under the Fed's 2 percent goal.

"It is a very aggressive policy and it is making me a little bit nervous that we are overcommitting to the easy policy," he told reporters after a speech to the Wisconsin Bankers Association. "We are taking risk."

Last month, the Fed voted to keep up asset purchases at an $85 billion monthly pace to lower borrowing costs and spur hiring. It said it would continue this policy, called quantitative easing, until it saw substantial improvement in the labor market outlook.

U.S. central bankers also pledged to hold interest rates near zero until unemployment falls to 6.5 percent, provided inflation does not threaten to rise above 2.5 percent.

As Fed officials mull when to taper or end the asset purchases - some, including Bullard, say that could happen this year - the debate may focus on potential inflation.

GEORGE BEARISH, BULLARD BULLISH

So will the outlook for the economy. On this front, George was decidedly more downbeat than her colleague, saying she expects the U.S. economy to grow just above a 2 percent in 2013, while unemployment falls around another half percentage point.

Bullard sees growth at 3.2 percent this year and next, he said Thursday, and sees the jobless rate dropping to 6.5 percent - the Fed's threshold for rethinking its low-rate policy - by the middle of next year. The U.S. jobless rate in December was 7.8 percent.

George emphasized the risks if the Fed continues to buy bonds at this rate, indicating little appetite for a prolonged Fed commitment to this policy.

"These purchases also have their own set of risks and are not without cost," she said. "At their current level and pace of growth, I believe they almost certainly increase the risk of complicating the (Fed)'s exit strategy."

Fed watchers have not heard much from George since she became a policy maker, but Fed watchers had anticipated she would follow her predecessor Thomas Hoenig in holding hawkish views, and her remarks Thursday did not disappoint.

Though Bullard too warned about the risks of inflation, he sounded more ready to stay the course on policy, for now.

"We've been predicting higher inflation and it really hasn't materialized so far," he said. "I think the way to proceed is to continue to be aggressive in our monetary policy and be cognizant that we could have an inflation problem in the future and that we would be ready to move and contain that if we need to."

(Reporting by Ann Saphir; Editing by David Gregorio)

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Comments (4)
SeniorMoment wrote:
The growth of dollars by the Federal Reserve Board is insignificant, since in reality the most new dollars are created by other nations, who have allowed their currency reserves to include on average 64% denominated as U. S. dollars, even though the USA only accounts for 22% of global production of goods, services and natural resources, and 70% of all currency trades at the International Bank of Settlements are done with dollars. Other nations would have to reduce their holdings of U. S. dollars in order for inflation to take over inside the USA.

Jan 10, 2013 5:55pm EST  --  Report as abuse
mutt3003 wrote:
Inflation can stay way below 2% forever when the Fed picks and chooses what goods or services it has as part of the CPI. Name anything that has not increased in price well more than 2% year over year. And don’t mention items where prices seemingly stayed the same only to find out that the weight or size was reduced. That’s still inflation.

Jan 10, 2013 6:03pm EST  --  Report as abuse
123456951 wrote:
As far as the FED is concerned, if wages are not increasing, then inflation is not increasing. I think that I read where healthcare costs in the US are suppose to rise 7% this year. And inflation figures don’t include volitile energy and food prices.

Jan 10, 2013 7:07pm EST  --  Report as abuse
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