Rising oil prices threaten U.S. growth, Federal Reserve Bank of Dallas President Richard Fisher and Federal Reserve Bank of Atlanta President Dennis Lockhart said.
“It is a double whammy” as “it slows down our economy” and “adds to inflationary pressures,” Fisher said on a panel discussion in Atlanta today. “It adds to the volatility of the financial system,” he said.
Lockhart said at the same event that he expects a “soft” first quarter in the U.S. in part because of the impact of the rising cost of gasoline on consumer spending.
U.S. central bankers are debating how to address rising inflation and when to start tightening policy after the Fed ends its purchases of $600 billion of Treasurys in June. Federal Reserve Bank of Richmond President Jeffrey Lacker and Philadelphia’s Charles Plosser have indicated they’re concerned about prices, with Lacker saying the central bank must tighten credit before inflation gains speed.
Lockhart, who has voiced support for the central bank’s plan to buy the $600 billion of Treasurys, said that so far “the economy seems to be absorbing that higher cost without severe reaction.” If oil prices top $150 a barrel for a sustained period, “it could have a more serious effect,” and “we could be in recessionary territory,” he said.
On April 11, crude oil traded in New York touched $113.46 a barrel, the highest since September 2008. Crude oil for May delivery slid $2.72, or 2.5 percent, to $106.94 a barrel at 11:30 a.m. on the New York Mercantile Exchange. Earlier, it touched $106.59. Prices have risen 28 percent in the past year.
Fed presidents rotate voting on monetary policy, with Fisher, 62, voting this year. When Fisher last sat on the committee in 2008, he dissented five times in favor of tighter policy. He has led the Dallas Fed since 2005. Lockhart doesn’t have a vote this year.
Fisher, who has criticized the Fed’s asset purchase program and expressed concern about rising prices, said the central bank has “successfully fought off” deflation.
“There is a lot of liquidity in the system,” Fisher said.
At a separate event in Atlanta later today, Fisher said that “no further amount of monetary accommodation would be wise” and the Fed might need “to curtail” some of its planned stimulus as the economy improves. He said “unpleasant” price reports may occur in the next couple of months.
“That recovery is slowly gaining steam and at least to my eyes seems self-sustaining,” Fisher said. “Adding still more liquidity or not withdrawing it in a timely manner,” would “do nothing to quell the inflationary pressures” and may “compound” them.
Fisher, Lockhart and other Fed officials will update their economic forecasts and review the Fed’s plan to purchase $600 billion in U.S. Treasurys at their April 26-27 meeting amid a strengthening labor market and higher inflation.
The Fed “can help create the conditions in which jobs are created,” Lockhart said. “We have had very accommodative monetary policy for quite some time and only recently have we seen job creation take effect,” he said. The Labor Department said this month that the unemployment rate dropped to 8.8 percent in March, the lowest level in two years.
Uncertainty over fiscal policy and shocks overseas in Japan and the Middle East are weighing on business confidence, Lockhart said. Standard & Poor’s today put a “negative” outlook on the AAA credit rating of the U.S., citing a “material risk” the nation’s leaders will fail to deal with rising budget deficits and debt.
Fisher said the action by S&P is a “good signal” if “it will focus the attention of those that have the responsibility” for balancing the budget. The bond market plays a “powerful role” and it’s “encouraging” if it puts pressure on Congress to address the deficit, he said.
Fisher told reporters after the second event in Atlanta that he expects he will “be at the front of the pack in advocating for tightening,” and that the FOMC will probably discuss “curtailing” accommodation at its next meeting.
“Before you start tightening, you stop loosening,” he said. “I still think we have a self-sustaining recovery, but I expect to have some moments of hesitancy and that may well have occurred in the first quarter,” due in part to the rise in energy prices.
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