ST LOUIS – The Federal Reserve will continue to raise interest rates amid strong U.S. growth and risks of higher inflation, with no hint that it is nearing a pause, Fed policy-makers made plain in comments this week.
"I think the inflation risks around the point estimate are skewed to the high side ... I would put a higher probability on an upside surprise," St Louis Federal Reserve President William Poole told reporters after delivering a speech to students.
"That calls for the Federal Reserve to make sure policy is risk-adverse with respect to that outlook," he said.
"We've been on a course of raising interest rates. The language in the last (Federal Open Market Committee) statement suggests that there was more to come...If we had wanted a different interpretation, we would have said something different," said Poole.
Although he is not a voting member of the Fed's policy committee this year, Poole is a respected economist and markets believe his views carry weight in its policy discussions.
The U.S. central bank raised rates by a quarter percentage point to 4.0 percent on November 1 and said it expected to keep lifting borrowing costs at a measured pace.
Markets bet this means three more consecutive quarter point rate hikes to 4.75 percent.
"We should continue that process as long as we have the view that the underlying economy is pretty robust...and the inflation risks are skewed to the upside," Poole said, adding the timing of any pause would be dictated by how growth fares.
"My position truly is that policy is driven by new information," he said.
Sandra Pianalto, the president of the Cleveland Fed, also pointedly declined to drop any hints that a pause was near.
"Our statement says we are continuing to remove that accommodation," she said, answering questions after a speech in Strongsville, Ohio. "Where we determine we are no longer accommodative again depends on economic conditions."
Forecasts for a drop in spending due to a jump in energy prices after hurricanes Katrina and Rita struck the U.S. have worried some economists. There are also signs the rampant U.S. housing market is cooling, with the Fed reporting a slackening in mortgages demand in its latest loan-officer survey.
But Poole said the risks of a sag in either output or employment were "relatively low" and he saw the drop in demand for home loans as evidence that stronger business spending was drawing investment from the housing sector.
"(That softness) is not a sign that economic growth is at risk but a displacement from one sector to a different sector," he said.
U.S. consumers have provided crucial support for the U.S. economy but a significant amount of their spending has been financed by cashing in on rising house prices, either by taking out an additional mortgage or refinancing at lower rates.
Pianalto said consumers had done a good job managing their increasing debt loads by refinancing at the lower rates that have prevailed in recent years.
She acknowledged, however, that households could face a harder time servicing debts as rates rise.
"As we start to see an increase in interest rates will that cause the consumer problems?" she asked rhetorically in response to a question. "I think it depends on whether that's gradual and how consumers adjust to that."
"In the past several years consumers ... have been very diligent in managing some of their debt in terms of refinancing to lower rates, but we'll have to ... keep our eye on this situation as the conditions change," Pianalto said.
In his earlier speech to students of Lindenwood University, Poole said the record U.S. current account deficit would inevitably adjust downwards, but was not at risk of causing a collapse in the value of the dollar.
"I believe the current account adjustment will be fairly slow and orderly, and that it may not begin for quite some time," he said.
(Additional reporting by Tim Ahmann in Washington)
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