U.S. monetary policy is unlikely to turn "restrictive" as the Federal Reserve raises interest rates at "a measured pace" in an expanding economy, Philadelphia Federal Reserve Bank President Anthony Santomero said yesterday.
"With output growth somewhat above its long-run potential, job growth sufficient to put us on a course toward full employment, and inflation low and stable -- then I expect we will be moving the federal funds rate up at a measured pace, as the FOMC indicated," he said, referring to the statement issued by the rate-setting Federal Open Market Committee a week ago.
A rate increase wouldn't represent "a shift from stimulative to restrictive monetary policy," Santomero said in remarks prepared for the Market News International Forum in New York.
"As long as the level of interest rates is relatively low, monetary policy is stimulating more rapid growth in spending," Santomero said. "So, moving along a path from the current federal funds rate to a neutral federal funds rate simply represents a gradual reduction in the degree of stimulus."
Santomero is a non-voting member of the FOMC this year. On May 4, the panel voted to leave the benchmark overnight lending rate at 1 percent, near a 46-year low, saying "well contained" inflation expectations should give them time to remove their low interest rate policy at a "pace that is likely to be measured."
He told reporters after his speech that the risks of disinflation have been "eliminated" by the sustained expansion and by stronger job growth.
Santomero was the second Fed official yesterday to suggest that the U.S. central bank doesn't see any immediate threat of rapid price gains. Chicago Fed President Michael Moskow said the Fed has "yet to see the kinds of pressure on labor and capital resources that would foreshadow a worrisome increase in inflation."
Santomero's speech provided the first detailed analysis of the Fed's strategy since the May 4 FOMC meeting.
The Philadelphia Fed president said the pace of interest rate changes depends on how the economy evolves. He said there are two risks: inflation expectations may rise, or job growth may continue to lag.
If employment growth falls short of expectations, "I believe it would be appropriate for the Fed to maintain a more stimulative policy by slowing the shift toward neutrality," he said.
Santomero said rising commodity prices are likely to have only a temporary impact on inflation.
"Strong demand emanating from more rapid economic growth around the world, particularly in China, has contributed to higher global prices for commodities like oil, steel and copper," he said.
The weaker dollar has also raised prices of imported goods. None of these events is likely to result in a sustained rise in prices, he said.