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Fed Focusing on Inflation, Sources Say

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From Reuters

Recent cuts in short-term interest rates appear to have been enough to sustain the recovery, and some Federal Reserve officials say the central bank will now focus more on keeping inflation in check.

The central bank, which pushed short-term rates lower Aug. 6 to bolster the recovery, can now focus on what one one Fed source called “consolidating price stability.” The source spoke on condition of anonymity during a recent conference in this resort town.

Fed board members, the presidents of Fed district banks, staff members and private economists spent three days discussing economics and trade issues at the conference sponsored by the Kansas City Fed bank.

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On Aug. 6, the Fed added funds to the banking system, pushing the federal funds rate down one-quarter point to 5.5%. Fed funds are those that banks lend to each other overnight. The rate is a key tool for the Fed to influence market rates and the pace of the economy.

The sources declined to discuss details of the latest meeting of Fed policy-makers in Washington last week, but they did say that a view is building that past interest rate cuts may have been enough to ensure that the economy will “muddle through.”

Since the recession that began in July, 1990, was shallow, the subsequent recovery should also be modest, the sources said.

Typically, growth in the first four quarters after a recession averages 5% to 6%, a level that raises the risk of high inflation. However, since this recession was not very deep, the rebound is expected to be only 3% to 3.5%, Fed sources said.

If the pick-up is not great, then inflation should not accelerate. While further moves to lower interest rates may still be appropriate if economic data are very weak, a modest rate of recovery would carry with it the advantage of modest inflation, the sources said.

Inflation has averaged a steady 4.1% from 1982 to 1990 on an annual basis, excluding an unusually low 1.1% in 1986 when oil prices collapsed and a high of 6.1% in 1990 when oil prices surged due to the Gulf War.

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Consumer price increases were running at a 4.4% annual rate in July.

But 4% is viewed as too high by the Fed, where some policy-makers are hoping to achieve 3%, Fed sources said.

The jump in durable goods orders of 10.7% in July, reported on Friday, coupled with gains in retail sales, support the argument that the economy is recovering and that the Fed’s past moves to ease credit may have been enough.

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