Former White House adviser Hubbard chides Fed

WASHINGTON (Reuters) - The Federal Reserve is jeopardizing its anti-inflation credibility by keeping interest rates too low, a former senior economic advisor to President George W. Bush warned in an opinion piece published on Monday.

"A continuation of a negative real federal funds rate and the increase in monetary growth accompanying it raises the risk of increasing inflationary expectations, a costly mistake to fix," Glenn Hubbard, a former chairman of the Council of Economics Advisers, wrote in the Wall Street Journal.

The Fed has slashed interest rates 3.25 percentage points to 2 percent since September to shield the U.S. economy from a credit crunch sparked by big subprime mortgage market losses.

"With inflationary expectations not declining, this stimulus will almost surely raise inflationary expectations as the economy improves," he said.

"This consequence can already be seen in surging commodity prices and the weakness in the foreign exchange value of the dollar," added Hubbard. Now dean of Columbia Business School in New York, Hubbard had been seen by some as a potential Fed chairman to succeed Alan Greenspan when he stepped down in 2006. Bush in fact chose Ben Bernanke.

The Fed halted the rate cut campaign last month and warned that inflation concerns had grown. But Bernanke's Congressional testimony since then has played up the risks still facing financial institutions and some analysts think the central bank will keep rates on hold until next year.

"The lower funds rate may augment collateral values, a key issue in the present crisis. But while this action may reduce credit stresses and downward pressure on asset prices, it is decidedly not in line with the Fed's stated long-run inflation objective," Hubbard said.

Arguing that monetary policy could not alone lift demand, Hubbard instead urged that fiscal policy be brought to bear and that tax cuts signed by Bush in 2001 and 2003 be extended.

"Clarity about a positive future for the 2001 and 2003 tax cuts which bolster collateral values -- along with a cut in corporate tax rates to promote investment -- would offer a much more potent tonic," he said.

(Reporting by Alister Bull; Editing by Theodore d'Afflisio)