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Friday, September 30, 2005

Santomero: The Fed Needs to Keep Raising Rates

Anthony Santomero, president of the Philadelphia Federal Reserve makes his position clear.  He, like other Fed officials we have heard from in recent days, thinks interest rates should continue to go up.  He also says "The Fed ha[s] a dual mandate, to oversee price stability and potential growth 'in that order'":

Fed official expects rebound after hurricanes, by Andrew Balls, Financial Times: The Federal Reserve needs to continue raising rates in order to remove unnecessarily accommodative monetary conditions but also to demonstrate its "unwavering commitment" to maintaining stable inflation, a top Federal Reserve official said. Anthony Santomero, president of the Philadelphia Federal Reserve, said the economy was likely to bounce back after ... hurricanes Katrina and Rita, with stronger-than-expected growth next year on a boost from reconstruction and government spending. High oil prices would boost headline inflation, and contribute to higher core inflation, he said. ... "The challenge for us as a central bank is to maintain price stability and maintain our commitment to price stability so that people recognise that this is an adjustment in the price level of an important commodity, but it is not an adjustment in the inflation rate," he said.

The Fed had a dual mandate, he said: to oversee price stability and potential growth "in that order". ... Mr Santomero said the economy was growing at a healthy pace before the hurricanes ... Katrina and Rita would contribute to slightly weaker growth in the second half of this year,... but ... the drop in consumer confidence after those storms should be swiftly reversed, based on past experience. Mr Santomero said he expected a post-hurricane rebound for 2006 "as the rebuilding and increased spending builds its own expectations of further good times". He remained confident healthy growth would continue next year ... above the economy's long-term trend rate of slightly less than 3½ per cent.

The impact of high energy prices on consumer spending was a key uncertainty, he said, adding that to date income and employment growth had allowed consumers to increase spending in spite of higher energy costs. Another key question was the consumer response as the housing market cooled. Mr Santomero said that, while he remained confident ... judging the underlying strength of the economy could remain difficult for the Fed at a time when the incoming data would be distorted by the disruption on the Gulf coast, making the central bank's job very difficult. Information about the US economy during the weeks between last week's FOMC decision and the next would become “fuzzier rather than clearer”, he said, "because of the disturbance affecting the data". He said that the committee would make decisions meeting by meeting and did not have a preordained path of rate increases in mind.

His statement that "The challenge for us .. is to maintain price stability and ... our commitment to price stability so that people recognise that this is an adjustment in the price level of an important commodity, but it is not an adjustment in the inflation rate" suggests he is worried about increases in inflationary expectations.  To prevent this, the Fed needs to demonstrate its "unwavering commitment" to price stability.

    Posted by on Friday, September 30, 2005 at 01:25 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)

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