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Fed's Stern: Inflation Waning on Oil Decline

Tuesday, 26 Aug 2008 04:29 PM

Inflation concerns are waning with oil prices receding, says Minneapolis Fed chief Gary Stern.

"From my perception, some of the concerns about inflation and inflation expectations seem to have diminished," Stern told CNBC.

Just a month ago, Stern was concerned that inflation risks were rising. Now, the mix of lower oil prices and tight credit could allow the Federal Reserve to hold off raising interest rates to stave off inflation.

Federal policymakers voted on Aug. 5 to leave the benchmark federal funds rate at 2 percent.

The Federal Reserve can now be "patient" with its approach to monetary policy, Stern says.

"It should help to alleviate some of the inflation concerns and inflation pressures that we had been confronting, assuming this sticks," says Stern, who is a voting member this year on the Fed's policy-setting Federal Open Market Committee.

"My guess is it's going to pay to be patient (on interest rates) at this point."

According to Stern, the current difficult and tight credit conditions are similar to the early 1990s when a lack of credit slowed growth for two to three years.

Stern says the economy is facing a similar outlook because lenders have become cautious as a result of the huge losses from subprime mortgages.

"I think it'll take some time for these headwinds to diminish," he says.

"In fact, I wouldn't be surprised if they didn't pick up a little more momentum first."

Although the 1990s got off to a slow start, the decade turned out well for the economy, he says. He predicts that 2009 will also start off sluggishly as well.

Stern said that while the economy has been "very subdued," it will be a "close call" as to whether the recent market downturns should be termed as a recession.

The current strengthening of the dollar has also benefited U.S. exports, he says.

Policymakers must be prepared to avoid any chance of inflation getting out of control when the economy returns to a normal mode, Stern says.

"If you wait till you have conclusive evidence, you run the risk of waiting too long," he said.

"The real message is that you've got to be willing, at some point along the way, to say 'you know, I have enough confidence in my outlook that it's time to go'."

Federal policymakers voted on Aug. 5 to leave the benchmark federal funds rate at 2 percent.

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Inflation concerns are waning with oil prices receding, says Minneapolis Fed chief Gary Stern."From my perception, some of the concerns about inflation and inflation expectations seem to have diminished," Stern told CNBC. Just a month ago, Stern was concerned that inflation...
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