Fed mixes signals on energy prices
September 22, 2006
By Scott Lanman
Washington - The US Federal Reserve adopted an ambiguous tone in discussing swings in energy prices as it kept interest rates on hold on Wednesday, providing fodder both to economists who say the central bank is finished raising interest rates and those who disagree.
The Fed cited "reduced impetus from energy prices" as a reason inflation pressures would probably ease, the only fresh language in its statement. In the same paragraph, it kept a reference to the dangers of "high" energy prices.
The mixed message reinforced speculation that the benchmark lending rate would remain at 5.25 percent until the end of the year.
"The Fed is going to be patient," said Anthony Chan, the chief economist at JPMorgan Private Client Services and a former Fed economist. "There is no telling if the huge decline in energy prices will hold. They have to talk tough, with inflation still above their comfort zone."
Crude oil touched $60 a barrel on Wednesday for the first time since March, having lopped 23 percent off its price since July 14, when it rose to a record high. Petrol is down 11 percent from a year ago and heating oil is at a seven-month low.
Chan said the Fed was more likely to reduce rates next year than raise them.
By repeating that "any additional firming" would depend on the economic outlook and incoming reports, the Federal Open Market Committee kept what San Francisco Fed president Janet Yellen called a "tightening bias".
Jeffrey Lacker, the president of the Richmond Fed, was the lone dissenter for the second consecutive meeting, again preferring a 0.25 percentage point increase in the overnight lending rate between banks.
A question that may have to be considered is whether falling oil prices will spur inflation.
"We see the energy prices backing down," Kansas City Fed president Thomas Hoenig said last week. "That will certainly, I think, give strength to consumer demand that might not have otherwise been there. But I don't see it accelerating inflationary pressures at this point."
Energy price drops have yet to filter through to the Fed's preferred inflation gauge, the personal consumption expenditures index minus food and energy. So-called core prices rose 2.4 percent in the year to July. Over the past three months they rose at a 2.7 percent annual rate.
Chairman Ben Bernanke and other Fed members have said they preferred that inflation gauge to stay between 1 percent and 2 percent; it has not measured less than 2 percent year on year since early 2004.
Fed officials acknowledged the depth of the downturn in property by characterising the market as "cooling", compared with a "gradual cooling" in the previous statement on August 8.
Swiss Reinsurance economist Arun Raha said: "Come the winter heating season, energy prices are likely to go up again. We still have wage pressures and tight capacity utilisation." - Bloomberg
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