Dallas Fed: Fed's Tightening Cycle May Be Ending

WASHINGTON – The Federal Reserve may soon end its series of interest rate increases but inflation remains a risk because of strong U.S. growth, Dallas Federal Reserve Bank (search) President Richard Fisher (search) said on Wednesday.

Bond markets rallied strongly on his words, betting they hinted of an impending pause in official rate hikes.

But analysts said markets had been selective in what they heard Fisher say, noting that no individual speaks for the Fed, apart from its powerful chairman, Alan Greenspan (search), and other Fed policy-makers had hinted rates were heading higher.

Fisher, who joined the Dallas Fed in April, told CNBC and the Wall Street Journal in separate interviews that the Fed was in the eighth inning of monetary tightening.

Using a baseball analogy, Fisher implied the Fed was getting ready to pause, provided inflation stayed tame.

"We've gone through eight innings here, 25 basis points an inning," Fisher told the Journal, referring to the eight quarter-percentage point rate hikes made by the Fed since it began hiking borrowing costs this time last year.

"The next meeting in June is the ninth inning. We'll take a look after that. We may have to go into extra innings in this contest against inflation," he said.

Baseball has nine innings, unless the two teams are tied and then they go into extra innings.

"Hedge funds that are long bonds (hold bonds) say that this was an intentional leak and stock market bulls agree. But I don't know where they get their confidence from," said Josh Stiles, senior bond strategist at I.D.E.A. in New York.

Other Fed watchers were equally dismissive of a planned tip-off to financial markets.

"Those leaks don't come from new reserve bank presidents, they come from Alan Greenspan," said Lyle Gramley, a former Fed Board governor and now senior economic adviser to the Stanford Washington Research Group.

"He's still a rookie. I don't think he chose his words very well," Gramley said, speaking of Fisher.

There have also been signals from other Fed policy-makers that the central bank has not made its mind up about pausing.

These include remarks from Chicago Fed President Michael Moskow (search) on May 26, who said the Fed's "measured pace" approach to steady rate rises was appropriate and a warning from Atlanta Fed President Jack Guynn the day before that U.S. interest rates were still below their neutral rate -- the level that neither boosts nor hinders growth -- in a hint they were heading up.

Minutes from the FOMC meeting on May 3 released last week also showed that the Fed's policy-setting committee was keenly aware that inflation pressures had picked up.

"I think the Fed goes one meeting at a time," said Tom Gallagher, an analyst with ISI Group. "I don't think there's a secret consensus that he (Fisher) might have even inadvertently revealed on what the Fed will do after the June meeting."

Fisher, a voting member of the Federal Open Market Committeethis year, replaced Robert McTeer in Dallas. McTeer had been a self-proclaimed inflation dove -- a central banker who would permit a little more inflation in favor of slightly lower interest rates -- and some saw Fisher in the same camp.

Minutes of reserve bank meetings showed that Dallas Fed directors had voted to keep rates on hold before the March 22 policy meeting.

But markets may also have heard what they wanted to hear from Fisher's words.

In his comments to the Journal, released on the newspaper's Web site after the television appearance, Fisher made plain that inflation was still troubling the Fed, indicating that a rate-hike pause was not a done deal.

"The economy is strong. It's inflation that's still a risk. We're not talking about rampant inflation, but about mold setting into a household, where it starts to grow," he said.

"We know the economy is growing nicely. What we don't yet know is whether we've reached that point, where we're operating policy in a way that doesn't encourage inflation."

Nonetheless, U.S. government bond prices rallied, with Fisher's comments and a weak U.S. manufacturing report pushing the yield on the 10-year note firmly below 4 percent to a fresh 13-month low around 3.90 percent.

The 10-year bond yielded about 4.7 percent a year ago. Since then, the Fed has raised its benchmark federal funds rate 2 percentage points to 3.00 percent. Mosts analysts believe it will raise rates by another quarter point at its next meeting, on June 29-30.