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UPDATE - Fed's Ferguson-inflation rise mostly transitory
Wednesday July 7, 3:47 pm ET
By Victoria Thieberger
(new throughout with question and answer session, adds byline)
NEW YORK, July 7 (Reuters) - Federal Reserve Vice Chairman Roger Ferguson said on Wednesday he believed the rise of U.S. inflation in recent months was largely transitory, but the central bank stood ready to act if that view proved incorrect.
Ferguson told the New York Association for Business Economics the inflation picture had deteriorated somewhat this year, but he considered much of the rise to be transitory.
"The economy does appear to be on a path of self-sustaining growth. The pace at which we move policy rates back to neutral is therefore the key issue," Ferguson said after a speech.
"One of the things that should be driving that is clearly the committee's judgment on whether or not the recent pick-up in inflation is in fact mainly due, or in large part due, to transitory factors," he said.
"If that proves not to be the case, then the committee clearly has an obligation to respond to it. If it proves that it is the case, then that reinforces, or could possibly reinforce, the current approach (of measured rate rises)."
Last week, the Federal Reserve raised interest rates for the first time in four years, taking the federal funds rate to 1.25 percent from 1.0 percent.
And policymakers reiterated they hope to lift interest rates in a "measured" fashion, which economists take to mean a series of quarter-point increases.
But the central bank has clearly been taken by surprise by the pick-up in inflation this year. Core inflation rose by 1.7 percent over the year to May, already above the Fed's forecasts for inflation for 2004.
NO LUXURY OF WAITING
Ferguson said there were different ways of looking at inflation dynamics. Focusing on labor costs, which recently stopped declining, suggested that further increases in wages could be absorbed by companies that have "very large profit margins across many industries."
Alternatively, looking at measures of how much excess capacity remains in the economy, Ferguson said the output gap seems to be closing, but that the unemployment rate showed the economy was still below full employment.
"The (Fed's policy) Committee does not have the luxury of waiting to see inflation itself pick up; it's whether or not the conditions that are conducive to an increase in inflation start to come into play," Ferguson said.
He said the inflation picture has "perhaps ... deteriorated somewhat" and the Fed was not complacent about inflation, but he stressed that "some of those forces that have been driving inflation do seem to be transitory."
In a speech earlier, the No. 2 Fed official said that, although U.S. productivity growth would inevitably slow from a recent brisk pace of 4 percent to 5 percent, it could likely maintained the solid pace seen since the mid-1990s.
"There are a number of reasons to expect that the stepped- up pace of underlying productivity growth that we have experienced since the mid-1990s can persist for a while longer," he said.
But in the short-term brisk growth in hourly output per worker could slow from its recent hectic pace.
"I would not be surprised if measured productivity growth over the next few years falls below the rates of the fourth- quarter 2001 through fourth-quarter 2003 period, or even, for a time, below the average growth rate from 1995 through 2003 (of 3 percent)," Ferguson said.
For much of the past two years, companies held back from hiring as they squeezed extra output from their workers, but a slowdown in productivity suggests hiring continue to improve in recent months. (additional reporting by Wayne Cole)
UPDATE - Fed's Ferguson-inflation rise mostly transitory
Wednesday July 7, 3:47 pm ET
By Victoria Thieberger
(new throughout with question and answer session, adds byline)
NEW YORK, July 7 (Reuters) - Federal Reserve Vice Chairman Roger Ferguson said on Wednesday he believed the rise of U.S. inflation in recent months was largely transitory, but the central bank stood ready to act if that view proved incorrect.
Ferguson told the New York Association for Business Economics the inflation picture had deteriorated somewhat this year, but he considered much of the rise to be transitory.
"The economy does appear to be on a path of self-sustaining growth. The pace at which we move policy rates back to neutral is therefore the key issue," Ferguson said after a speech.
"One of the things that should be driving that is clearly the committee's judgment on whether or not the recent pick-up in inflation is in fact mainly due, or in large part due, to transitory factors," he said.
"If that proves not to be the case, then the committee clearly has an obligation to respond to it. If it proves that it is the case, then that reinforces, or could possibly reinforce, the current approach (of measured rate rises)."
Last week, the Federal Reserve raised interest rates for the first time in four years, taking the federal funds rate to 1.25 percent from 1.0 percent.
And policymakers reiterated they hope to lift interest rates in a "measured" fashion, which economists take to mean a series of quarter-point increases.
But the central bank has clearly been taken by surprise by the pick-up in inflation this year. Core inflation rose by 1.7 percent over the year to May, already above the Fed's forecasts for inflation for 2004.
NO LUXURY OF WAITING
Ferguson said there were different ways of looking at inflation dynamics. Focusing on labor costs, which recently stopped declining, suggested that further increases in wages could be absorbed by companies that have "very large profit margins across many industries."
Alternatively, looking at measures of how much excess capacity remains in the economy, Ferguson said the output gap seems to be closing, but that the unemployment rate showed the economy was still below full employment.
"The (Fed's policy) Committee does not have the luxury of waiting to see inflation itself pick up; it's whether or not the conditions that are conducive to an increase in inflation start to come into play," Ferguson said.
He said the inflation picture has "perhaps ... deteriorated somewhat" and the Fed was not complacent about inflation, but he stressed that "some of those forces that have been driving inflation do seem to be transitory."
In a speech earlier, the No. 2 Fed official said that, although U.S. productivity growth would inevitably slow from a recent brisk pace of 4 percent to 5 percent, it could likely maintained the solid pace seen since the mid-1990s.
"There are a number of reasons to expect that the stepped- up pace of underlying productivity growth that we have experienced since the mid-1990s can persist for a while longer," he said.
But in the short-term brisk growth in hourly output per worker could slow from its recent hectic pace.
"I would not be surprised if measured productivity growth over the next few years falls below the rates of the fourth- quarter 2001 through fourth-quarter 2003 period, or even, for a time, below the average growth rate from 1995 through 2003 (of 3 percent)," Ferguson said.
For much of the past two years, companies held back from hiring as they squeezed extra output from their workers, but a slowdown in productivity suggests hiring continue to improve in recent months. (additional reporting by Wayne Cole)
