Also see Fed's Moskow says pretty much the same... #msg-7894050 and Greenspan's comments on the US losing control of its budget deficit #msg-7894156
Fed's Yellen hints more rate hikes ahead Tue Sep 27, 2005 2:39 PM ET By Ross Finley
LONDON (Reuters) - San Francisco Federal Reserve President Janet Yellen on Tuesday hinted the U.S. central bank would increase interest rates still further, saying the Fed must uphold its pledge to keep inflation subdued.
"The Federal Reserve must deliver -- again and again -- on its commitment to price stability," Yellen told members of Parliament at a conference convened by the European Economics and Financial Center.
An unacceptable rise in inflation is "clearly not on the table," Yellen said in her speech.
The U.S. economy faced various risks, including the impact of high energy prices and huge current account, trade and budget deficits but pushing monetary policy to a "neutral" stance remains "plausible, even probable," she added.
The benchmark federal funds rate stands at 3.75 percent following 11 consecutive quarter percentage point rate hikes but it is still thought to be below the low end of a neutral range, which neither promotes nor stymies economic activity.
U.S. Treasury yields rose on Yellen's comments, which dealers said suggested the Fed was determined to stay ahead of inflation.
"Considering her usual moderate policy leanings, this is relatively tough talk," said strategists at Action Economics.
Yellen later said during audience questioning that the neutral Fed funds rate might be lower than in the past, although it was hard to pin down.
HORNS OF A DILEMMA
She said higher energy prices "put U.S. monetary policy on the horns of a dilemma" as policymakers balance possible passthrough of prices to core inflation against potential long-lasting cuts in consumer spending if high prices persist.
The good news on inflation is that some slack remains in labor markets and labor compensation growth is subdued, even though before Katrina the U.S. jobless rate of 4.9 percent was near conventional estimates of full employment, she said.
"I wouldn't be surprised to see core PCE inflation actually fall a bit over the next two years" and settle in near the center of the one percent to two percent range, Yellen said.
Yellen termed that her "comfort zone" on PCE inflation, but later said that she doubted that more formal inflation targeting would be adopted in the United States.
PCE, or personal consumption expenditure, is seen by the markets as the Fed's favored measure of inflation.
Articulating a numerical definition of what constitutes price stability, would be possible, she added.
The Fed's 12th District President, who will be a voting member of the policy-setting Federal Open Market Committee in 2006, repeated comments from earlier this month that monetary policy has little scope to cushion the immediate economic fallout from disasters such as Hurricane Katrina.
The Fed's role was said to be keeping the national economy on an even keel while fiscal policy tackles immediate regional crises. Even so, the prospect of a rising budget deficit poses a longer-term risk, she said.
"Estimates of the extent of spending are escalating, and the recovery and bounce-back, fueled by massive fiscal stimulus, could propel the U.S. economy on an unsustainable upward trajectory," Yellen said.
NOT FED'S PLACE TO BURST THE HOUSING BUBBLE
Yellen said Fed policy should not be focused on deflating asset price bubbles such as the current sky-high housing market in the United States.
"A tighter policy to deflate a housing bubble could impose substantial costs on other sectors of the economy," she said.
The housing market could lose some "oomph" if long-term U.S. interest rates rise back to a more normal relationship with short-term rates, unwinding the current yield curve conundrum, where long-term yields are not much higher than short-term ones, she said.
If that triggers a spending slowdown, the Fed would have time to cushion its impact with an easier policy, she said.
(Additional reporting by Victoria Thieberger in New York and Ana Nicolaci Da Costa in London)
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