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Fed to Keep 'Deliberate' Rate Pace, Official Says

By Nell Henderson
Washington Post Staff Writer
Friday, April 8, 2005; Page E02

Inflation bears watching but is under control, allowing the central bank to continue raising its benchmark short-term interest rate at a "deliberate" pace, a top Federal Reserve policymaker said yesterday.

"Inflation has remained reasonably well contained," Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, said after a speech to the National Economists Club.

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When asked whether the Fed had fallen "behind the curve" in fighting inflation, Santomero said, "Clearly, no."

The Fed is "moving in a deliberate manner toward a more neutral rate," Santomero said, referring to actions designed to lift the benchmark rate to a level that would neither stimulate or slow economic growth.

Fed officials recently have noted rising inflation pressures, stirring some concern in financial markets that they might be preparing to raise rates more aggressively in coming months to control price increases.

Santomero's comments indicated he feels no need to pick up the pace of rate increases now.

The Fed raised the federal funds rate, the rate charged between banks on overnight loans, to 2.75 percent last month from 2.5 percent. It was the seventh quarter-percentage-point increase since June.

Fed officials said in a written statement after their meeting last month that they believed they would probably continue lifting the rate at a "measured" pace, which has come to mean small increases spread over time.

The Fed's top policymaking committee has used "measured" to describe the likely path of rate increases since last May. But several Fed officials have been uncomfortable with the phrase, worrying that financial markets would hear it as a pledge of future actions rather than as an expectation, and they may drop it at their May meeting.

Santomero's comments indicated he is comfortable with the current pace -- regardless of how it's phrased. He said uncertainty about the economy "supports the notion that it makes sense for policymakers to move in a slow and cautious manner."

Consumer prices have risen just 1.6 percent in the past year, excluding those for volatile food and energy items, according to the Fed's preferred measure, he noted. That's safely within his comfort range of 1 to 2 percent.

But, he noted, more businesses are finding it easier to raise prices, and the economy should enjoy "robust" growth this year, assuming oil prices don't spike further. As a result, the Fed must remain vigilant on inflation, he said.

"Gradualism has a role to play in monetary policy, but not at the expense of falling behind the curve," Santomero said.

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