Fed Hammers Home Message Against Inflation

WASHINGTON(Reuters) – Top Federal Reserve officials hammered home on Tuesday theU.S. central bank’s determination not to allow inflation to get out ofcontrol, cementing views that interest rates will rise later this year.

The remarks by two regional Fed presidents followed hard-linecomments on Monday night from Fed Chairman Ben Bernanke that the Fedwould "strongly resist" any deterioration in inflation expectations.

Dallas Federal Reserve Bank President Richard Fisher, one of themost anti-inflation members of the interest rate-setting Federal OpenMarket Committee after three dissents against steep rate cuts, echoedBernanke.

"We want to make sure the message is clear … that we will notcountenance building inflationary expectations," he told the Council onForeign Relations in New York.

A second policy-maker, Boston Federal Reserve President EricRosengren, also warned that inflationary pressures were being stoked bysoaring energy and food prices, and after aggressive Fed interest ratecuts since September.

"The effects of significant increases in food and energy prices arestill feeding through the economy, as are the impacts of appropriatelyaggressive monetary and fiscal policy responses to the recent financialturmoil," he said in a speech at a conference on Cape Cod hosted by theBoston Fed.

The remarks helped tilt odds in financial futures markets to an 80percent likelihood that the Fed will hike its overnight fed fundsbenchmark by a quarter percentage point to 2.25 percent at its meetingin 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 subprimemortgage market last year, which sparked a global credit crunch thathas chilled U.S. growth.

Fisher said he wanted to draw the line at 3.5 percent for benchmarkrates and made plain that recent signals on inflation expectations werecausing him some concern.

"The anecdotal evidence, the headlines that we’re reading in thenewspapers, and the survey data, is not encouraging," he told hisaudience in response to a question.

"That worries me a great deal. It’s beginning to work its way intoexpectations, 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 clearlyhinting that the easing campaign had been paused while policy-makerswaited for the benefits of lower borrowing costs to filter through intothe economy, and as emergency Fed steps to calm spooked financialmarkets healed frayed nerves.

Since then, the Fed has also noticeably stiffened its rhetoric insupport of the dollar, which notched record lows against the euro thisyear as the U.S. central bank slashed rates while the European CentralBank stayed on hold.

Foreign exchange market conditions will be reviewed by financeministers and central bank chiefs of the Group of Eight rich nations ata meeting in Japan this weekend.

In advance of this gathering, remarks by ECB President Jean-ClaudeTrichet that euro zone borrowing costs may in fact have to rise havebuffeted the dollar further. But Fisher dismissed talk that the Fed andECB 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 Nicolacida Costa on Cape Cod, Mass., Mark Felsenthal and Tim Ahmann inWashington; Editing by Andrea Ricci)