CHARLOTTE, North Carolina - Inflation remains a big concern despite some relief from the recent rapid fall in energy prices, top Federal Reserve officials said on Tuesday.
Jeffrey Lacker, of the Richmond Fed, said runaway inflation remains a the greater risk even if the U.S. economy slips into recession, which he argued is still a possibility.
"We can't sustain inflation at this pace," Lacker told reporters following at the Richmond Fed's Charlotte branch. "Moderation in growth by itself isn't likely to bring down inflation dramatically."
His counterpart from the Minneapolis Fed, Gary Stern, sounded a bit more sanguine. He told CNBC television that lower oil prices should help keep inflation under control and the U.S. central bank should be "patient" in its approach to monetary policy.
Richard Fisher, the Dallas Fed president viewed as the central bank's most ardent inflation hawk, seemed to think differently. He told the Dallas Morning News in an interview that the Fed would act quickly to ward off any possibility that an expectation of rising prices sets in.
The comments highlighted the tricky situation facing policy-makers, who are simultaneously confronted with rising costs and a slowing economy. U.S. consumer prices jumped 5.0 percent in the year to June, while economic growth turned negative in the fourth quarter of last year before recovering in the first half of 2008.
Officials' sense of relief over the recent pullback in oil prices, which have fallen from records near $147 a barrel to $113 a barrel in just a month, was palpable.
"It should help to alleviate some of the inflation concerns and inflation pressures that we had been confronting, assuming this sticks," Stern told CNBC.
For Lacker, however, the possibility that prices might soon come down should not be taken for granted.
Lacker pointed out that, when adjusted for inflation, the federal funds rate for overnight lending, currently at 2.0 percent, is at its lowest level in post-war history. He referred to such policy as "exceptionally" stimulative.
FINDING BOTTOMS
Still, he had plenty of concerns about the health of the economy as well. For one thing, Lacker said it was too difficult to tell when there would be a bottom for housing prices, which are at the center of the global credit crunch.
Fisher agreed, saying the U.S. economy was in for prolonged slow growth and could shrink later this year.
Many banks held real-estate linked assets on their balance sheets and are now posting massive losses. In the latest such news, JP Morgan announced it had racked up $1.5 billion of losses so far in the third quarter, while Wachovia boosted its tally of second quarter losses to a gaping $9.1 billion.
In all, financial institutions globally have reported around $450 billion in losses, a sum that amounts to nearly 3.0 percent of America's yearly economic output.
The Fed has cut short term interest rates sharply since September of last year, when official borrowing costs stood at 5.25 percent, as the financial crisis that begun in the mortgage sector deepened.
Lacker said it was impossible to know what the final count of mortgage-related losses would eventually be.
"Substantial uncertainty remains about the ultimate size of mortgage losses," he said.
Stern said tight credit conditions were reminiscent of the period in the early 1990s when a scarcity of credit restrained growth for two or three years. He suggested the economy faces similar constraints now because lenders have grown cautious in the wake of subprime mortgage losses.
"I think it'll taken some time for these headwinds to diminish," Stern said, "In fact, I wouldn't be surprised if they didn't pick up a little more momentum first."
Apart from the troubles in housing, Lacker said commercial construction could be the next to falter, posing a growth risk for the rest of the economy.
He also highlighted the weakness in consumer spending, which he said did not get as much of a boost from Congress' $150 billion stimulus package as had been hoped.
Jeffrey Lacker, of the Richmond Fed, said runaway inflation remains a the greater risk even if the U.S. economy slips into recession, which he argued is still a possibility.
"We can't sustain inflation at this pace," Lacker told reporters following at the Richmond Fed's Charlotte branch. "Moderation in growth by itself isn't likely to bring down inflation dramatically."
His counterpart from the Minneapolis Fed, Gary Stern, sounded a bit more sanguine. He told CNBC television that lower oil prices should help keep inflation under control and the U.S. central bank should be "patient" in its approach to monetary policy.
Richard Fisher, the Dallas Fed president viewed as the central bank's most ardent inflation hawk, seemed to think differently. He told the Dallas Morning News in an interview that the Fed would act quickly to ward off any possibility that an expectation of rising prices sets in.
The comments highlighted the tricky situation facing policy-makers, who are simultaneously confronted with rising costs and a slowing economy. U.S. consumer prices jumped 5.0 percent in the year to June, while economic growth turned negative in the fourth quarter of last year before recovering in the first half of 2008.
Officials' sense of relief over the recent pullback in oil prices, which have fallen from records near $147 a barrel to $113 a barrel in just a month, was palpable.
"It should help to alleviate some of the inflation concerns and inflation pressures that we had been confronting, assuming this sticks," Stern told CNBC.
For Lacker, however, the possibility that prices might soon come down should not be taken for granted.
Lacker pointed out that, when adjusted for inflation, the federal funds rate for overnight lending, currently at 2.0 percent, is at its lowest level in post-war history. He referred to such policy as "exceptionally" stimulative.
FINDING BOTTOMS
Still, he had plenty of concerns about the health of the economy as well. For one thing, Lacker said it was too difficult to tell when there would be a bottom for housing prices, which are at the center of the global credit crunch.
Fisher agreed, saying the U.S. economy was in for prolonged slow growth and could shrink later this year.
Many banks held real-estate linked assets on their balance sheets and are now posting massive losses. In the latest such news, JP Morgan announced it had racked up $1.5 billion of losses so far in the third quarter, while Wachovia boosted its tally of second quarter losses to a gaping $9.1 billion.
In all, financial institutions globally have reported around $450 billion in losses, a sum that amounts to nearly 3.0 percent of America's yearly economic output.
The Fed has cut short term interest rates sharply since September of last year, when official borrowing costs stood at 5.25 percent, as the financial crisis that begun in the mortgage sector deepened.
Lacker said it was impossible to know what the final count of mortgage-related losses would eventually be.
"Substantial uncertainty remains about the ultimate size of mortgage losses," he said.
Stern said tight credit conditions were reminiscent of the period in the early 1990s when a scarcity of credit restrained growth for two or three years. He suggested the economy faces similar constraints now because lenders have grown cautious in the wake of subprime mortgage losses.
"I think it'll taken some time for these headwinds to diminish," Stern said, "In fact, I wouldn't be surprised if they didn't pick up a little more momentum first."
Apart from the troubles in housing, Lacker said commercial construction could be the next to falter, posing a growth risk for the rest of the economy.
He also highlighted the weakness in consumer spending, which he said did not get as much of a boost from Congress' $150 billion stimulus package as had been hoped.
