In various speeches over the past few weeks, Federal Reserve officials seem to be setting the stage for the central bank’s next rate hike.
Federal Reserve Chairman Ben Bernanke has not been so direct, but inflation warnings from top Fed members — some with rate-setting votes — seem to be designed to soften reaction if the committee decides to hike rates soon.
That would be quite a change from the past nine months, during which the Fed has trimmed the federal funds rate by 325 basis points to 2.0 percent, looking to prevent a financial meltdown and recession.
Yet rapidly rising inflation — it's up 3.9 percent in the year through April — has prompted some Fed officials to shift their focus.
Dallas Fed Bank President Richard Fisher is one of them. He is the most hawkish member of the Federal Open Market Committee, dissenting three times from committee decisions to cut rates this year.
“We want to make sure the message is clear … that we will not countenance building inflationary expectations,” Fisher recently told the Council on Foreign Relations.
Boston Fed Bank President Eric Rosengren also expressed worries about price increases in a recent speech.
“The effects of significant increases in food and energy prices are still feeding through the economy, as are the impact of appropriately aggressive monetary and fiscal policy responses to the recent financial turmoil,” he says.
Charles Plosser, president of the Philadelphia Fed Bank, voted against the last two Fed rate cuts.
He said in a recent speech that maintaining price stability is the primary function of the central bank, adding that low inflation is also the best way to ensure sustainable economic growth, the other half of the Fed's dual mandate.
And Fed Chairman Ben Bernanke himself warned recently that the central bank would “strongly resist” any deterioration in inflation expectations. Bernanke says the likelihood of a severe U.S. economic slump has diminished, while "upside risks" to inflation are forcing the Fed to be more vigilant.
The economy expanded 0.9 percent in the first quarter, hardly a sign of buoyant expansion. But with oil and other commodity prices surging, many experts now see inflation as a bigger problem.
The dollar’s drop also is inflationary, pushing import prices higher. Those prices rose a whopping 15.4 percent on average in the year through April.
So it’s no wonder that Fed policymakers have begun warning about the dangers of a weaker currency. The dollar’s slump, including a 38 percent drop against the euro over the past five years, has brought an "unwelcome" spike in consumer and import prices, Bernanke says.
"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations," he says.
All this talk has left financial futures markets pegging an 80 percent chance for the Fed to boost the fed funds rate by 25 basis points, to 2.25 percent, in September. The markets point to a 3 percent fed funds rate by next March.
The Fed next meets June 24 and 25.
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