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Dallas federal reserve says inflation near intolerable Original Source Link: (May no longer be active)
http://quote.bloomberg.com/apps/news?pid=10000006&sid=amL75ulujcnE&refer=homehttp://quote.bloomberg.com/apps/news?pid=10000006&sid=amL75ulujcnE&refer=home
Fisher Says Prices Near `Upper End' of Comfort Zone (Update3)
Oct. 4 (Bloomberg) -- Rising energy prices are pushing inflation about as high as the Federal Reserve can tolerate, Fed Bank of Dallas President Richard Fisher said.
``The inflation rate is near the upper end of the Fed's tolerance zone and it shows little inclination to go in the other direction,'' Fisher said in a speech to the Dallas Chamber of Commerce.
Fisher's comments suggest Fed policy makers are more concerned with inflation than a potential slowing of growth after Hurricanes Katrina and Rita struck the U.S. Gulf Coast, cutting U.S. energy production and sending oil prices soaring.
``Inflation has been on a slight upward tilt the past couple of years,'' Fisher said. ``We now face higher energy prices and businesses' desire to pass the increased costs on to their customers.''
U.S. consumer prices rose 3.6 percent in August from a year earlier. Excluding food and energy, the increase was 2.1 percent. Those figures do not include post-hurricane energy price increases.
The personal consumption expenditure index minus food and energy, the Fed's preferred inflation gauge, rose 2 percent in August from a year earlier, the upper end of the 1.75 percent to 2 percent range it forecast in July.
Oil
Crude oil futures on the New York Mercantile Exchange, at $63.40 a barrel, are 27 percent higher than a year ago. The average price of all grades of gasoline is 51 percent higher, at $2.975 a gallon in the week ended October 3rd, according to the Energy Department.
``We are dealing with the immediate and secondary effects of Katrina and Rita,'' Fisher said. ``In times like these the Federal Reserve must rely more than ever on anecdotal evidence to get a feel for the economy.''
In another speech today, Fed Bank of St. Louis President William Poole said the Fed's increased transparency improved investors' ability to predict how the central bank will adjust interest rates and respond to economic data.
``It is quite clear that the markets understand Fed policy to a much greater extent than before,'' Poole said in a speech at the University of Washington in Seattle. ``The market's improved understanding, and the Fed's efforts to improve clarity of monetary policy decisions and decision processes, has much to do with the economy's improved stability.''
Fisher, 56, became president of the Dallas Fed Bank in April and is the newest member of the policy-making Federal Open Market Committee.
Rate Increases
The Fed lifted its benchmark interest rate for the 11th straight time last month to 3.75 percent from 3.50 percent. Hurricane Katrina will be a ``near-term'' setback for the economy, the Fed said in a statement announcing the Sept. 20 decision. Fed Governor Mark Olson voted against the move, saying he preferred to leave the rate unchanged.
San Francisco Fed Bank President Janet Yellen said last week that the U.S. economy will see a ``significant dip'' in growth for the rest of the year because of the damage from Hurricane Katrina and Rita and the recent surge in energy prices. She said the FOMC won't allow inflation to increase to ``unacceptable'' levels as energy prices surge.
Hurricanes
Hurricane Katrina, the most expensive natural disaster in U.S. history, prompted economists and policy makers to cut their forecasts for economic growth for the rest of the year. Most of New Orleans was submerged on Aug. 29 when Katrina struck the city, leaving thousands of low-income residents trapped in their homes or in overcrowded and undersupplied shelters.
Three weeks later, Hurricane Rita struck the Gulf Coast at the border of Texas and Louisiana. The storms damaged several oil rigs and Gulf Coast refineries and cut supplies of crude oil, gasoline, heating oil and natural gas. The U.S. Minerals Management Service today said 90 percent of Gulf crude oil production is still shut down, along with 72 percent of natural gas production.
Fisher said the economy was slowing before the storm and ``more recent data on consumer sentiment, personal income and consumption confirm a slowing trend.''
The cost of the storm recovery to the U.S. government may rise to as much as $200 billion, say federal officials including Republican Senate Majority Leader Bill Frist. That rebuilding is likely to give the economy a boost starting in 2006 and the impact of that ``will be spread over years.''
Government Deficits
Fisher warned that lawmakers must rein in spending or risk losing the flexibility that makes the U.S. competitive in a global economy. He said the Fed will not rescue the government from rising debt by allowing inflation to take off.
``As a member of the FOMC, I will never vote to monetize fiscal profligacy,'' he said. ``And while I never speak for my colleagues, it is my distinct impression that none of them will do so either.''
In June Fisher said the FOMC was ``clearly in the eighth inning of a tightening cycle.''
``We have the ninth inning coming up at the end of June, we feel strongly we have been getting good fast hard pitches right down the pipe,'' he said at that time.
Fisher then voted for three subsequent rate hikes. The FOMC next meets November 1.
Speaking to reporters today, Fisher said his June remarks ``were incompletely reported, but that's the past and what I said today is where I stand and that's how I express myself.''
Last Updated: October 4, 2005 16:11 EDT
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