Fed Members Uncertain on the Next Step

Federal Reserve officials voiced concern about inflation Tuesday, but also expressed doubts on future policy, emphasizing uncertainty at the top of the U.S. central bank as to how much more it needs to hike interest rates.

William Poole, president of the Federal Reserve Bank of St. Louis, made hawkish remarks in a newspaper interview about inflation, continuing a recent rash of pointed comments that investors believe have increased the chances of another rate increase.

But several other top Fed officials stressed that monetary policy takes time to make itself felt, indicating patience in waiting to see how the 16 consecutive quarter-percentage point hikes since June 2004 affect U.S. growth.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said it was premature to judge whether the Fed was “behind the curve� in respect to inflation.

“When I look at the inflation expectations, I have seen some movement up, but I’ve seen that in the past,� Hoenig said after a speech in Montrose, Colo., hosted by the Kansas City Fed’s Denver branch. “So I think it is frankly too early to tell in terms of whether we have this issue of being behind the curve.�

Fed Gov. Susan Bies, addressing a bankers group in California, also emphasized the gradual effect of rate increases.

“We’re in the range where different models say we should be for the economy,� she said about interest rates. “As a result, we are in a period where we’re in transition and transition means we don’t exactly know where we are going to stop.�

St. Louis Fed chief Poole, in an interview with the Wall Street Journal, made the most pointedly hawkish comments of the day, hinting that the Fed might have to become restrictive in setting policy to keep inflation at bay.

“If inflation turns out to exceed our expectations, our target range, I do not believe we can count on a slowing economy to bring inflation down, by itself, quickly,� he said.

Poole is a noted policy hawk whose preferred rate of inflation is zero -- properly measured.

Separately, Fed minutes released Tuesday said several boards of regional Fed banks believed that the benchmark federal funds rate was near the upper end of its neutral range even before the central bank bumped it up again May 10.

The minutes also showed that the Kansas City Fed bank was not alone in late April in taking a “wait-and-see approach� on the need for further increases in the discount rate, which governs direct Fed lending to banks.

The directors of the New York and Philadelphia Fed banks also had voted in late April to hold the discount rate steady.

However, the minutes said that by early May those two banks had joined nine of the other 12 regional banks in asking for a discount rate increase.

The minutes of a May 1 Fed meeting on discount rate requests said some of the banks that had voted for an increase considered “inflation somewhat higher and growth a bit stronger than they had expected.�

Also Tuesday, the Philadelphia Fed bank named Charles Plosser as its new president, effective Aug. 1, bringing a policy hawk and inflation-targeting advocate to the Fed. He replaces Anthony Santomero.