Fed Officials Hint at Rate Hike Pause

The Federal Reserve is nearing the end of its two-year run of interest rate increases as the U.S. economy enters a stretch of slower economic growth, Fed officials said Monday.

But a higher-than-desired rate of U.S. core inflation was making the prospects for the August meeting of the Federal Open Market Committee, and an endpoint for rate increases, hard to peg.

Janet Yellen, president of the San Francisco Federal Reserve Bank, said monetary policy was at a “tricky” stage as the Fed balanced the risks of both not raising rates enough and letting inflation run, and raising rates too much and choking off growth.

Yellen said in a speech at San Francisco’s Golden Gate University that the central bank’s benchmark short-term rate, the federal funds rate, was “in a vicinity that is roughly appropriate,” and that the Fed did not need to keep raising rates to the point where inflation actually turned down.

Earlier, St. Louis Fed President William Poole said he felt split about the need for an 18th consecutive interest rate hike at the Fed’s meeting next week.

“I am still very much in the 50-50 camp in terms of the probabilities for the August meeting,” Poole told reporters after speaking at a breakfast sponsored by the Southern Legislative Conference in Louisville, Ky.

The Fed wants to do what is needed to contain inflation but not more, Poole said, cautioning about a “more draconian policy” than is necessary.

Yellen, a voting member of the Federal Open Market Committee, and Poole, a nonvoter this year, probably will be the last Fed officials to weigh in before the Aug. 8 policy meeting.

The Fed has raised its overnight interest rate 17 straight times since June 2004 -- at first to unwind a policy of low rates in response to an economic slowdown, and more recently to keep inflation pressures contained.

Financial markets lean toward a pause in August, which would hold the fed funds rate at the current 5.25%. A pause by the Fed would confirm that economic growth slowed sharply in the second quarter.

The government Friday estimated that the economy’s pace last quarter fell to an annualized 2.5% real rate, down from 5.6% in the first quarter.

But the same report said a measure of core inflation -- price increases excluding food and energy -- rose at a 2.9% annualized rate in the second quarter, the fastest pace since 1994.

The Fed fears that consumers and businesses could begin to assume that inflation will continue to rise, making higher prices a self-fulfilling prophecy.

Yellen said that knowing when the Fed had reached the end of the road in tightening credit was “tricky” because of the lag between the Fed’s policy actions and their effect on the economy, as well as “disappointing” news on core inflation.

“In the present circumstances, I would consider it appropriate for the actual [fed funds] rate to be a bit above neutral -- in other words, I’d like it to be modestly restrictive” on the economy, to damp inflation, she said.