New York, NY, September 28, 2006--Federal Reserve officials expressed guarded confidence on Wednesday that inflation will ease, but Jeffrey Lacker, the Fed's most outspoken hawk, was unconvinced.
"I am not comfortable that we have got a downward trend that I can be that confident in at the present. And I am worried about the danger of inflation staying, remaining, about where it's been," Lacker, president of the Federal Reserve Bank of Richmond, told Reuters in an interview.
Thomas Hoenig, Kansas City Fed president, was more hopeful, saying subpar growth was likely to linger into 2007 and pull inflation down by injecting more slack in the economy.
"The inflation numbers will stabilize and then continue to come down," Hoenig told business leaders in Lincoln. He anticipated a "very modest, but very steady" downtrend in the core consumer price index toward 2 percent.
Core CPI, a measure which excludes energy and food prices, was 2.8 percent higher in August than a year earlier.
Hoenig gave a mostly upbeat reading on the economy, looking for growth to bounce back -- but still stay below trend -- in 2007 after dipping to an annualised rate in the second half of 2006 of 2.0 percent to 2.5 percent.
The Federal Open Market Committee (FOMC) held its benchmark federal funds rate steady this month at 5.25 percent in a 10-1 vote in which Lacker was the sole dissent.
It was the second straight meeting in which policy-makers decided to sit pat after 17 straight hikes from mid-2004 to June of this year. It was also Lacker's second-straight dissent.
Financial markets expect the Fed to hold steady for the rest of 2006, reflecting suggestions by Fed officials that they want to watch how the earlier rate moves played out.
The next policy move is uncertain and will rely on incoming data, said Hoenig, who under a rotating system does note vote in FOMC meetings this year but who will vote in 2007.
"Actions we have taken in the past, in the first half of this year ... are still working their way through the economy."
Lacker said that while the U.S. economy was on solid ground, inflation was still a worry and that another rate increase would have helped.
"The question is how are we going to bring about restoring price stability," he said. "My colleagues' views differed from mine. I thought that we needed another policy move to ensure that we had a high enough probability of getting back (to lower inflation levels)."
"Growth doesn't slow inflation, central banks slow inflation. It has to do with what really drives inflation dynamics," he said.
Nor has he been mollified by the recent drop in inflation expectations implied by U.S. treasury inflation-protected securities (TIPS), which he saw driven mostly by changes in the headline CPI as energy costs fall.
Earlier, Federal Reserve Governor Randall Kroszner said in a speech in New York that recent declines in the price of energy had helped mitigate concerns about inflation in the short run.
Hoenig, meanwhile, said the decline in energy prices was likely to drag down headline inflation levels and was "favorable to the U.S. economy overall."
While differing on the growth/inflation linkage, Lacker and Hoenig agreed that the much-discussed cooling U.S. housing market did not threaten the overall economy.
Weakness in residential real estate and its potential to affect other parts of the economy are cited by some economists as reason for the Fed to cut rates aggressively in 2007..
Lacker said that he saw no sign the cooling housing market had spilled into other parts of the economy, while Hoenig said the long-anticipated topping out in residential real estate after a multi-year bull run has been "orderly."
