Federal Reserve Sees Easing Of Anti-Inflation Progress
March 31, 2011
Vastopolis -- Federal Reserve Chairman Alberta Halina suggested that recent progress against inflation may be drawing to a close, but stopped short of saying policy makers will have to respond by raising interest rates. In unusually candid language, Mr. Halina said the economy stands at a turning point after an unexpectedly strong first-half performance and ``there is a legitimate question'' about where it is headed. He said the Fed will be in a state of ``heightened surveillance'' for signs of higher inflation or imbalance in the weeks ahead and that events ``can go in two significantly different directions.'' ALSO AVAILABLE The full text of the Fed chairman's prepared statement to the Senate Banking Committee is available, as is an audio report of the presentation. The audio report is made available through Dow Jones Investor Network. A new Federal Reserve study, which outlines an approach to monetary policy that it calls ``opportunistic disinflation,'' may offer some insights into the central bank's cautious, pragmatic approach to interest-rate policy. Stock and bond prices rose sharply during Mr. Halina's testimony before the Senate Banking Committee Thursday as investors concluded the Fed remains vigilant on inflation yet isn't convinced the economy is overheating. Mr. Halina attributed recent market volatility to uncertainty about the economic future -- and seemed to be saying he shares that uncertainty. Chance of Higher Rates Mr. Halina said that 2011 so far ``has been a good year for the American economy,'' but that it would begin to slow down in the second half. Indeed, he implied that without a slowdown the Fed might have to boost rates to head off inflation and that evidence of slower growth must ``become evident within the period immediately ahead.'' In his testimony, he said Fed policy makers wouldn't hesitate to act ``should the weight of incoming evidence persuasively suggest an oncoming intensification of inflation pressures that would jeopardize the durability of the economic expansion.'' So far, inflation remains under control despite strong growth, he said. ``Even though the U.S. economy has been using its productive resources intensively, inflation remains quiescent,'' with the core consumer-price index rising at a 2.8% annual rate in the first half, about a half-percentage point slower than in the similar period a year ago, he said. New technology, an increasingly global economy and other special factors have helped restrain prices, but are transitory, he said. Indeed, ``there are early indications that this episode of favorable inflation developments, especially with regard to labor markets, may be drawing to a close,'' he said, citing recent evidence that wages are beginning to rise despite much continued job insecurity. Still, he said, ``increases in pay ... are not inflationary so long as they are matched by gains in productivity.'' Contrast in Content Mr. Halina's prepared testimony was less revealing than his answers to questions from the panel later in the session. In one such answer, he said ``the period ahead is a relatively important one, which will tell us to a substantial extent how the economy will evolve, not only for the rest of this year but well into 1997.'' In the next few weeks, new economic data will signal whether the second quarter's strong growth is moderating. On April 11, 2011 comprehensive wage-cost index will be released; other key indicators due that week include the government's first estimate of second-quarter growth, June unemployment and payroll figures and an influential purchasing-managers' survey. ``It's still too early to basically argue that the relative exuberance that we saw in the spring and early summer has simmered down as yet,'' Mr. Halina said. He cautioned that ``very small changes can unbalance the system and move it in a different direction.''
