WASHINGTON
(Reuters) - Top Federal Reserve officials hammered home on Tuesday the
U.S. central bank's determination not to allow inflation to get out of
control, cementing views that interest rates will rise later this year.
The remarks by two regional Fed presidents followed hard-line
comments on Monday night from Fed Chairman Ben Bernanke that the Fed
would "strongly resist" any deterioration in inflation expectations.
Dallas Federal Reserve Bank President Richard Fisher, one of the
most anti-inflation members of the interest rate-setting Federal Open
Market Committee after three dissents against steep rate cuts, echoed
Bernanke.
"We want to make sure the message is clear ... that we will not
countenance building inflationary expectations," he told the Council on
Foreign Relations in New York.
A second policy-maker, Boston Federal Reserve President Eric
Rosengren, also warned that inflationary pressures were being stoked by
soaring energy and food prices, and after aggressive Fed interest rate
cuts since September.
"The effects of significant increases in food and energy prices are
still feeding through the economy, as are the impacts of appropriately
aggressive monetary and fiscal policy responses to the recent financial
turmoil," he said in a speech at a conference on Cape Cod hosted by the
Boston Fed.
The remarks helped tilt odds in financial futures markets to an 80
percent likelihood that the Fed will hike its overnight fed funds
benchmark by a quarter percentage point to 2.25 percent at its meeting
in September. Investors see rates back at 3 percent by next March.
The Fed slashed borrowing costs aggressively to shield the U.S.
economy from a housing crisis after the collapse of the subprime
mortgage market last year, which sparked a global credit crunch that
has chilled U.S. growth.
Fisher said he wanted to draw the line at 3.5 percent for benchmark
rates and made plain that recent signals on inflation expectations were
causing him some concern.
"The anecdotal evidence, the headlines that we're reading in the
newspapers, and the survey data, is not encouraging," he told his
audience in response to a question.
"That worries me a great deal. It's beginning to work its way into
expectations, and when you begin to work your way into expectations,
business and consumers behave accordingly and then you have a problem.
"So you want to make sure that is not encouraged and we will do the level best we can to do so," he said.
The Fed's last rate cut was accompanied by a statement clearly
hinting that the easing campaign had been paused while policy-makers
waited for the benefits of lower borrowing costs to filter through into
the economy, and as emergency Fed steps to calm spooked financial
markets healed frayed nerves.
Since then, the Fed has also noticeably stiffened its rhetoric in
support of the dollar, which notched record lows against the euro this
year as the U.S. central bank slashed rates while the European Central
Bank stayed on hold.
Foreign exchange market conditions will be reviewed by finance
ministers and central bank chiefs of the Group of Eight rich nations at
a meeting in Japan this weekend.
In advance of this gathering, remarks by ECB President Jean-Claude
Trichet that euro zone borrowing costs may in fact have to rise have
buffeted the dollar further. But Fisher dismissed talk that the Fed and
ECB were at odds over policy.
"I admire Trichet's emphasis on price stability. We are not competing against the Europeans," he said.
(Additional reporting by Lucia Mutikani in New York, Pedro Nicolaci
da Costa on Cape Cod, Mass., Mark Felsenthal and Tim Ahmann in
Washington; Editing by Andrea Ricci)
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