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CHICAGO, Nov 22: Federal Reserve Vice-Chairman Roger Ferguson said on Friday the likelihood that abundant capacity will restrain US prices as the economy recovers means less likelihood that interest rates must soon rise.
Indeed, inflation still seems more likely to move lower than increase, Ferguson said in remarks prepared for delivery to the Executives’ Club of Chicago.
Under these circumstances, the central bank has the luxury to monitor events before it has to confront the need to return the stance of policy to a neutral position, Ferguson said.
His remarks echoed those of other Fed commentators recently, who have similarly signaled that the US central bank will allow time for excess capacity to be put to use before they start to ratchet up currently low interest rates.
Ferguson said he expects US economic growth to be sustained, though not at the lofty 7.2 per cent annual rate by which gross domestic product expanded in the third quarter.
Although the recovery now appears to have turned the corner, much additional progress remains to be made before our country’s labor and capital resources are fully utilized, Ferguson said, referring to the point at which price pressures might normally be expected to appear.
The Fed vice-chairman’s remarks were mostly upbeat. He noted the nation’s job market appears to have stabilized during the summer, and more hiring is under way.
He also said businesses seemed less fearful about investing. The business sector has been the locus of weakness in this expansion, Ferguson said. However, the extreme caution that had been gripping firms now appears to be dissipating.
He said the risk that recovery might stall out cannot be discounted completely — if, for example, the lift that consumer spending got in the third quarter from tax cuts faltered.
But Ferguson said the possibility that might happen was less now than was the case even a few months ago.
Although I do not expect a repetition of the extraordinary economic performance of the third quarter, I do expect growth to be sustained, Ferguson said. Still, he added that even should growth be hearty enough to start reducing slack in capacity use rates, the pool of underutilized resources is large and it will take some time to be worked off completely.
MINNEAPOLIS: Inflation is unlikely to pick up next year and as long as it stays quite low, official US interest rates can stay low as well, Minneapolis Federal Reserve President Gary Stern said on Friday.
I don’t expect to see any material acceleration of inflation next year, Stern told Reuters in an interview, stressing that companies have little pricing power in a highly competitive economy.
Stern said his expectation was that inflation over the next four quarters would be roughly the same as over the past four quarters. That implies there would be little reason for the Federal Reserve to start raising interest rates.
If inflation stays quite low there is a good chance that interest rates will also stay quite low, he said.
The central bank’s benchmark federal funds rate stands at 1.00 per cent, a 45-year low, but financial markets are speculating the Fed could switch gears and start raising interest rates in May or June next year after a recent burst of strong economic growth.
Stern added that rates may not stay as low as they are today, but would still be low by historical standards. He said the current low-rate environment may seem unusual now, but looking back with hindsight in perhaps 10 years’ time, it may not seem so unusual. In the 1950s and 1960s, inflation was tame and the Fed kept rates low for extended periods.
Stern, who is not currently a voting member of the Federal Open Market Committee that sets official US interest rates, has in the past been considered “hawkish,” the market’s term for describing policymakers who are more concerned about the risks of higher inflation.—Reuters
