Thursday, May 5, 2011

Officials Defend Fed's Stance on Inflation

Thursday, May 5, 2011

Two Federal Reserve officials defended the central bank's stance on inflation, arguing that food and energy price increases are likely to slow on their own and if the Fed were to try to hasten that it might do more harm than good.

"We are seeing a temporary bulge in inflation before we return to an underlying level of about 1.25 to 1.5% annually," said John Williams, president of the Federal Reserve Bank of San Francisco in his first public comments since being named to the post in March.

With his comments, Mr. Williams placed himself firmly in the camp of Fed Chairman Ben Bernanke, who believes that recent inflation increases will prove transitory and thus that the Fed can keep interest rates near zero. The Fed's policy, Mr. Williams said, wasn't the main factor driving commodities prices higher.

Another Bernanke loyalist, Eric Rosengren, president of the Federal Reserve Bank of Boston, said surging food and energy prices are largely due to supply shocks such as bad weather hurting food crops in Russia and Australia and political upheaval in the Middle East causing worries about the supply of oil. Since the mid-1980s, the connection between commodities price changes and overall inflation has waned, Mr. Rosengren said.

"If supply shocks tend to have a transitory impact on headline inflation, and do not pass through to any meaningful extent into core inflation, then monetary policy need not respond to the price increases caused by the supply shock," Mr. Rosengren argued. Accommodative monetary policy "can remain in place and continue to support economic growth."

In an interview following his comments, Mr. Rosengren said that when the time does come to tighten the easy money policies, it could be done in a very gradual way. The Fed sees inflation remaining below its unofficial target of 2% in 2012 and 2013, and because unemployment is still well below its goal of 5.2% to 5.6%. Because the economy will take such a long time to get back to normal, a gradual pace of tightening "would be just fine," he said.

The comments mark the beginning of what could be another flurry of commentary from Fed officials in the wake of a policy meeting last week in which the central bank decided to end its $600 billion bond-buying program in June. Mr. Bernanke held a news conference after the meeting in which he laid out the Fed's thinking on big issues like inflation and when it might start to raise interest rates.

Not everyone agrees with his stance. The Fed runs the risk of being complacent, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, told reporters Tuesday. Though Fed officials like Mr. Rosengren have said the public is confident that inflation will remain contained, Mr. Hoenig said he's not so sure that's the case. The Fed is placing great weight on its ability to maintain the public's confidence that inflation will remain low.

Mr. Hoenig said he's often asked about rising food and energy prices by individuals and business leaders, he said. "People are concerned about inflation," he said.

"We've got to start taking some steps to start to tighten monetary policy as we continue on through 2011 to make sure we don't allow inflation to get away from us," James Bullard, president of the St. Louis Fed, said in an interview last week.

—Luca Di Leo contributed to this article.

Write to Jon Hilsenrath at

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