Fed Officials Mum on Interest-Rate Policy

BOSTON – Federal Reserve officials gave no sign Friday that an end to interest rate hikes is right around the corner, even though benchmark rates have reached a broadly neutral level.

Speaking on a panel about monetary policy-making, Boston Fed President Cathy Minehan said the Federal Open Market Committee was "still working on an answer" regarding how long to continue its string of rate increases.

The FOMC meets on Jan. 31 and is expected to raise benchmark short-term rates for a 14th time in the current tightening cycle, pushing the fed funds rate to 4.50 percent. Prospects for the Fed's March meeting hang in the balance.

Minehan later told reporters that the federal funds rate was at a neutral level that neither stimulates nor hinders growth. "You have to look at these things in ranges. I think we are at the bottom of the range," she said.

While monetary policy may no longer be accommodative, the U.S. economy "appears to have solid, non-policy-driven forward momentum," Minehan said.

Fed policy from this point will be more dependent on incoming data than it has been the the past couple of years, when "short-term interest rates needed to rise," she said.

Speaking on the same panel, Dallas Fed President Richard Fisher said globalization has helped hold prices down in recent years but that protectionism and chronically high budget deficits put those benefits at risk.

"Protectionism ... would undercut globalization's favorable impact on inflation," Fisher said. "Deficits and protectionism could lead to interest rates higher than they would otherwise need to be in order to maintain low inflation."

Minehan echoed other Fed officials in stressing that price stability should be goal No. 1 for the central bank.

Inflation, especially core measures that exclude food and energy, has been slow to build in recent years, but actions that undermine the goal of price stability risk undermining "the hard-won credibility of the central bank."

Fisher said productivity growth was a key for the Fed's policy outlook. "If productivity growth can stay near 3 percent, monetary policy can accommodate relatively faster growth without ignition inflation," he said.

Minehan and Fisher are non-voting members of the Federal Open Market Committee in 2006.

Minehan said the lag typically associated with the implementation of monetary policy and its effect on the economy may be shorter and less variable than in the past, partly because of the intermediation of financial markets.

"The recent incredible resilience of the U.S. economy to a wide range of challenges suggests uncertainty may be smaller now," she said.

Minehan said questions of how the Fed should shape its market-sensitive policy statements "nagged" at her.

Forward-looking language risks conveying that the bank's policy moves are a foregone conclusion and poses a risk of limiting flexibility, she said.

Heading into a new era, the Fed is grappling with whether central banks, in general, should set inflation targets, Minehan said. Also in play is the potential for an oil shock to feed through to core inflation, and questions about what the shape of the yield curve might be saying about the economic outlook, she said.

"For such uncertainties, 'what-ifs' and models may be less effective and a more judgmental approach to policy setting is required," Minehan said.