Fed's McTeer: U.S. Economy Past 'Soft Patch'

DALLAS – The rut hit by the U.S. economy in the second quarter was largely due to higher oil prices and the country has now moved on, Federal Reserve Bank of Dallas (search) President Robert McTeer (search) said Tuesday.

"I'm hopeful that the soft patch is mostly behind us. I don't see any good reason for the soft patch. I'm sure high energy prices are a big part of it and I'm hopeful they will come down even more than they have," he told reporters after a speech to the Greater Dallas Chamber.

The Fed is expected to raise interest rates by a quarter point at its next policy meeting on Sept. 21 to 1 However, that was not the impression given by McTeer, a self-proclaimed dove among Fed policymakers.

He said third- and fourth-quarter gross domestic product (search) growth would be better than the second-quarter, which slowed to 2.8 percent from 4.5 percent in the first three months of the year.

McTeer also stressed that Fed rates were still low in real, inflation-adjusted terms.

"I would point out to you though that even though we raised short-term rates twice, they're still one-and-a-half percent which is lower than the annualized inflation rate by most measures," he said. "So the real federal funds rate is still negative to zero."

The Fed has raised rates by a quarter-percentage point twice since June 30, when it hiked for the first time in four years, but McTeer characterized this not as a tightening in policy, but "as easing back on the accelerator just a bit."

Turning to inflation, he said that with slack in the economy, strong productivity growth and fading stimulus from monetary and fiscal policy, "I don't think inflation is going to be a major problem in the next year or so."

The Fed has said it hopes to be able to raise rates at a measured pace, but this depends on inflation staying under control despite soaring energy costs and stronger growth.