In separate appearances on the eve of Fed Chairman Alan Greenspan's (search) semi-annual testimony before Congress, two regional Fed officials reiterated the central bank intends to raise interest rates at a moderate pace and that will help keep a lid on inflation pressures.
Boston Fed President Cathy Minehan, speaking in Providence, R.I., on Monday, said the spike in inflation so far this year was most likely temporary and there was still slack in the economy to absorb inflation pressures.
"The increases were largely due to one-time factors like oil, food and other things that should subside over time," she told the New England Community Development Council (search).
Still, Minehan acknowledged the usual Fed caveat that it will remain "vigilant" on inflation and will be watching upcoming data carefully.
Greenspan has already said that if inflation does not subside as the Fed currently expects, the central bank will act more forcefully on interest rates.
Meanwhile, Minneapolis Fed President Gary Stern said on CNBC television on Monday that a modest pace of interest rate hikes is still the best course.
"We've been pretty clear about saying policy has been accommodative for a significant period of time, and we intend to reduce that accommodation in a measured way. And for my nickel, that is the course that is appropriate to be on at the moment," Stern said.
The federal funds rate stands at 1.25 percent after the Fed raised interest rates a quarter of a point last month for the first time in four years, and financial markets widely expect further increases to keep inflation in check.
Stern also said modest rate rises should not derail the U.S. economy. Financial markets expect the federal funds rate to be close to 2.0 percent by year-end.
Both Fed officials on Monday played down the soft patch in economic data for June.
Various economic reports, including retail sales, employment and industrial production, were weaker than expected, and economists are mixed as to whether the summer pause was temporary or the start of a broader slowdown.
"Our forecast (at the Boston Fed) takes the point of view that the spending slowdown, the employment slowdown and uptick in inflation — all three of these things are temporary," said Minehan, who is a voting member on the Fed's policy committee this year.
"But these are things you need to watch and need to watch carefully," she added.
Stern concurred that the pause did not signal a stalling of economic activity.
"June was obviously a month that was softer, but the economy tends to bounce around a bit and I wouldn't over-emphasize the June situation," said Stern, who is not a voter on policy this year.
Financial markets are waiting to hear semiannual testimony on Tuesday from Greenspan, who is likely to flesh out the thinking behind the Fed's recent rate hike and its outlook for the economy and inflation.
While his remarks on the outlook tend to be balanced, market reaction can be volatile as investors focus on one aspect or another of Greenspan's lengthy commentary, which lasts for two or three hours with questions.