Fed's Rate Increases May Come Quickly
Officials Don't Feel Bound to 'Measured' Pace
By Nell Henderson
Washington Post Staff Writer
Saturday, June 12, 2004; Page D12
Two Federal Reserve bank presidents added their voices yesterday to the chorus of central bank officials warning that rising inflation may force them to raise interest rates more rapidly than many investors expect.
These officials, including Chairman Alan Greenspan, indicated publicly this week that they do not feel bound to raise rates at a "measured" pace. That was the word they used just over a month ago, in a statement issued after their last meeting, to describe the likely course of coming rate increases.
Sandra Pianalto , president of the Federal Reserve Bank of Cleveland, suggested in a speech yesterday that the inflation risks may have grown since that meeting, when policymakers decided to leave at 1 percent their target for the federal funds rate -- the rate charged between banks on overnight loans.
Since then, more U.S. businesses have been able to raise their prices, the prices of imported consumer goods have climbed and energy price spikes have "prompted concerns," Pianalto said.
The key question for the Fed now is whether the price spurts reflect temporary pressures -- such as the rebound from abnormally low inflation last year, oil price increases that reflect fears of terrorism and commodity price surges reflecting China's overheated economy -- or pressures that will continue to build as the U.S and global economic recovery continues.
"At the moment, although firm evidence of persistent inflationary pressures may be limited, recent price statistics give me reason for pause," Pianalto said. "If you believe that the economy's momentum has turned and strengthened appreciably, then you might logically conclude that inflationary pressures are more likely than not to emerge as the expansion progresses, unless [the Fed's interest rate] policy adjusts."
Pianalto then quoted Greenspan's statement Tuesday that if the central bank's earlier judgment "proves to be misplaced," the Fed "is prepared to do what is required to achieve the maintenance of price stability."
"In my personal view, the word 'measured' is more of a plan than a pledge," Federal Reserve Bank of Atlanta President Jack Guynn said in a speech yesterday, translating the same sentiment into blunter language.
Guynn said the current low inflation level is "acceptable" but added that "a great deal depends on how much of the recent spate of price increases turns out to be transitory."
Wall Street economists generally expect the Fed to raise the rate target to 1.25 percent at their next policymaking meeting on June 29 and 30. But they vary widely in their forecasts of how briskly the central bank will continue to raise rates thereafter.
© 2004 The Washington Post Company