As the US recovery gathers pace, policymakers must stay alert to inflation dangers, Federal Reserve Bank of St. Louis president William Poole said Thursday.
Maintaining steady prices was easier than bringing inflation down, he said.
PHOTO: BLOOMBERG
"But success in maintaining low inflation will not come automatically -- the Fed must not fall asleep at the switch," said Poole, who is a non-voting member of the Federal Open Market Committee (FOMC).
US markets are sweating over when the FOMC may raise the target for the key federal funds rate.
As the economy stalled last year, Federal Reserve chairman Alan Greenspan and fellow FOMC members slashed the rate in a 13-month series of cuts from 6.50 percent to a 40-year low of 1.75 percent.
"Fiscal policy turned more expansionary last year, and monetary policy became, I believe, highly expansionary," Poole said.
"Money growth was high and short-term interest rates were driven down to a low level. Expansionary policy may show up somewhere, or a little bit in lots of places. The result could be upside surprises in coming quarters."
The economy was now out of the woods, he added.
"While it is possible that recent data are deceiving us, I believe that the recession most likely ended in December 2001 or January 2002," Poole said.
The US recovery would likely be "somewhat milder" than the average post-recession performance, he said.
And over the longer run, the US performance would depend on sustained productivity gains and low inflation.
"As the economy settles into a pattern of sustained growth, policy will also adjust from recession-fighting mode to economic-growth mode," Poole said.
"Unless forecasters are far off base in their view of the economy's prospects, in time short-term interest rates will rise to maintain a monetary policy consistent with long-run price stability."
The timing of interest rate increases would depend on data showing the pace of recovery and possible risks to price stability, he added.
"Although no one can rule out surprises, the economy is stable and poised for higher growth."
Adding to the bullish outlook, Poole's colleague, Richmond Federal Reserve Bank president J. Alfred Broaddus, also presented a bright picture for the economy.
"I will tell you that I believe optimism about productivity growth for the period ahead -- while necessarily somewhat speculative -- is well grounded both logically and in terms of recent experience," he said in Charleston, South Carolina.
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