April 15, 2011 / 1:25 AM / 6 years ago

Fed's Hoenig worried on inflation; Evans not

<p>Kansas City Federal Reserve President Thomas Hoenig speaks regarding "Ending Government Bailouts" at the American Economic Association Conference in Atlanta, Georgia January 5, 2010.Tami Chappell</p>

WEST LAFAYETTE, Indiana (Reuters) - To judge by their polar opposite reactions, two top U.S. Federal Reserve officials could have been looking at completely different sets of U.S. inflation data on Friday.

That's largely because they were.

Chicago Fed President Charles Evans said the rise in the March U.S. Consumer Price Index data was "in line with low underlying inflation," referring to core CPI, which rose 1.2 percent from a year earlier.

Evans, a voter on the Fed's policy-setting committee, said strong monetary accommodation remains necessary as the U.S. economy improves, and it's unlikely he will push for tighter policy this year.

His view is in line with that of core members of the Fed, including Chairman Ben Bernanke, who has said the effect of the rising price of oil on inflation is "transitory."

Kansas City Fed President Thomas Hoenig, one of the Fed's most consistent hawks, repeated his call for the Fed to put short-term interest rates back up to 1 percent, from near-zero where they are now.

Speaking to an audience at Purdue University in Indiana, he said he was worried about inflation, which he said Friday's data showed was growing "robustly."

"Total inflation is what I worry about -- it has food, which we all basically want and need, and it has energy, which we all basically want and need," Hoenig said.

Headline inflation rose 2.7 percent year on year in March, data on Friday showed, the biggest gain since December 2009.

"There is a reasonable argument that it is a temporary thing," he said, "but it is also perhaps related to the fact that monetary policy has accommodated some of those increases."

The Fed should begin normalizing policy soon and not wait too long before making adjustments, or otherwise risk tipping the economy back into recession, Hoenig said.

"There are two things: the size of the adjustment will be a factor, and the duration before we introduce the adjustment will be a factor," Hoenig said. "I think the smaller, the sooner, then you get expectations generated and you get people thinking, 'I'd better match my assets and liabilities because if I don't I'm going to find myself in trouble'."

The economic recovery is gathering steam, and rising commodity prices are stirring up anxiety about inflation around the world and throwing into question how and when the Fed will begin to tighten monetary policy. The European Central Bank has already taken steps in that direction.

But Hoenig is in the minority at the Fed, which analysts expect to complete a $600 billion bond-buying program in June and to hold off from rate increases until next year.

Evans's comments underscored those expectations.

"As long as core inflation year over year is 1.5 percent or lower, I'd be surprised if I'm advocating a tightening in policy" in 2011, Evans told reporters on the sidelines of the annual Hyman P. Minsky conference in New York.

"At the moment I think that what's going on with food, energy and commodity prices is a relative price adjustment due to stronger global demand around the world, and some one-off supply effects ...," he added.

"Those are one-off or transitory effects and it's much too early to say that they've got embedded in underlying inflation."

Inflation is not yet at a "tipping point," Evans said.

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