Hoenig says Fed on inflation watch

[notiCIas]

Hoenig says Fed on inflation watch

K.C. president echoes other comments, says jump in labor costs and commodities pushing up prices.

October 6, 2005: 6:25 AM EDT


CASPER, Wyo. (Reuters) - The combination of rising price pressures from wages and commodities means U.S. central bank policy-makers must be specially wary of inflation, a top Federal Reserve policy-maker says.

The remarks by Thomas Hoenig, president of the regional Kansas City Fed bank, buttressed other recent commentary implying Fed officials think interest rates will keep rising.

Hoenig told business leaders in Casper, Wyo., that, even before hurricanes Katrina and Rita struck the refinery-rich Gulf Coast, energy prices were starting to rise. Since then, gasoline and natural gas prices have spiked up.

"I'm not concerned that we'll have a massive breakout (in inflation) but it's important to know what kinds of pressure are in the economy and what we have to be alert to ... so that we can in fact sustain long-term growth," Hoenig said Wednesday.

He noted rates for U.S. productivity -- hourly output per worker -- were easing to around 2.5 percent from as much as 4 percent to 5 percent in recent years. Higher productivity is associated with rising living standards while lower rates mean it costs more to produce the same amounts of goods.

"So we're seeing unit labor costs rise at about a 4 percent rate and that's the highest it's been since year 2000, so we have some wage pressures that look to be entering the economy at this point," Hoenig said.

More demand, higher prices
In addition, he noted that prices for commodities like steel and cement were likely to be pushed up by the rebuilding after hurricanes Katrina and Rita.

"That means we have resource pressures continuing in the economy," he added.

"Any one of these items by themselves I think you could deal with and explain ... but now we have them coming together at the same time from a period of time in which monetary policy had been accommodative," Hoenig said.

"So there is this issue of inflation, not that we have it because 2.2 percent core inflation is a modest level, but we don't want it to get higher than that because then we start changing the inflationary psychology of the economy and we do not want to see that," he added.

The Fed has raised interest rates 11 times since mid-2004 -- to 3.75 percent for its federal funds rate from the 1958 low of 1 percent.

Hoenig is not a voting member of the Federal Reserve's policy-setting Federal Open Market Committee. But his comments were similar in tone to those of several other policy-makers in recent days, including Philadelphia Fed Bank President Anthony Santomero on Tuesday night.

"To keep cyclical price pressures and any transitory spike in energy prices from permanently disrupting the price environment, the Fed will have to continue shifting monetary policy from its current somewhat accommodative stance to a more neutral one," Santomero told a group in Williamsport, Pa.

Everyone on alert
Dallas Fed Bank President Richard Fisher told the Dallas Chamber of Commerce on Tuesday that policy-makers were on the alert.

"The inflation rate is near the upper end of the Fed's tolerance zone, and it shows little inclination to go in the other direction," Fisher said.

Both Fisher and Santomero are voting members of the FOMC.

While Hoenig expressed caution about risks to the economy, especially from potential inflation, he was generally upbeat about prospects for growth.

"While the U.S. economy is going to face some pretty significant challenges, and does face some pretty significant challenges, my overall assessment is that the national economy ... will in fact be able to withstand it and I think have solid growth as we move through this transition into next year, 2006, and beyond," Hoenig said.

He said the hurricanes might subtract 0.5 to 1 percentage point off U.S. economic growth in the second half of this year, according to private and Fed forecasts, though he personally thought it would be closer to 0.5 percentage point.

But the negative impact will be transitory while rebuilding the Gulf Coast regions that were hardest hit will recapture much of the growth next year.