Washington, DC, April 5, 2006--Economic growth looks set to slow to a non-inflationary pace, Federal Reserve officials said on Tuesday, suggesting the Fed's long campaign of interest rate increases is nearly over.
"We've been aiming towards converging to a balanced growth path that we can continue on on a sustained basis, as we saw from 1994 to 2000. And I think we're pretty close to it," Richmond Federal Reserve Bank President Jeffrey Lacker said.
Lacker's optimism on a "balanced" economy dovetailed with comments from Kansas City Fed chief Thomas Hoenig, who repeated his belief benchmark overnight rates were close to where they need to be--as long as the economy follows the script.
"We have ... systematically moved the fed funds rate or the policy rate from a very accommodative level, about 1 percent, to what we think of as a more neutral level," he said in remarks that closely mirrored a speech he delivered on Friday.
"This is definitely, I think, within the range of neutrality, perhaps even at the upper end of neutrality," he said, referring to a level that would neither boost nor weigh on growth. "But whether it is the right rate or not depends on how the economy plays out."
Dallas Fed chief Richard Fisher also delivered a dovish message, saying a tight U.S. labor market does not pose the same inflationary risk as in the past.
"We need to ... rejig the equations that inform our understanding of the maximum sustainable levels of U.S. production and growth," Fisher said in a speech on how globalization has changed U.S. inflation dynamics.
With the U.S. unemployment rate at a historically low 4.8 percent, some Fed officials--including Hoenig and Lacker--have said the nation is probably close to "full employment," which could mean further declines in the jobless rate would boost inflation pressures.
The Fed raised short-term interest rates last week to 4.75 percent for the 15th straight time since mid-2004 in a bid to head off inflation. But it said more rate hikes may be needed, warning that price pressures could build if the labor market tightened further.
Lacker, a voting member of the Fed's policy-setting committee this year, and Hoenig, who is not, both said the U.S. economy looked set for growth of about 3.5 percent this year, despite some cooling in the housing market.
"Plausible rates of moderation in housing activity will not pose a problem for overall activity this year or next," Lacker said, an assessment echoed by his colleague from Dallas. Lacker also said the inflation picture was looking better than many had expected six months ago, with longer-term inflation expectations still moderate despite the run-up in energy prices over the last couple of years.
"We are not seeing any sign of rising inflation in the most recent data," he said.
Lacker noted that the core price index for personal consumption expenditures, the Fed's preferred inflation measure, was up just 1.8 percent over the last 12 months--not far from the 1.5 percent increase he and some other Fed policy-makers think a good long-run target.
The Richmond Fed president said nearly a million jobs have been created in the last four months, a pace he said is more than double that needed to keep pace with population growth--but he said job growth alone would not cause inflation unless the Fed's interest-rate path was too low.
In his speech, Fisher, who does not vote on interest rates this year, argued globalization had weakened the link that had existed in the past between tight U.S. labor markets and inflation.
He said once-reliable forecasting tools such as the Phillips curve, an equation that predicts inflation based on the tightness of the U.S. job market, had lost their usefulness.
