Officials Split on Outlook for Rates

Federal Reserve Bank of Chicago President Michael Moskow said Tuesday that the central bank might need to resume raising interest rates to reduce inflation and ensure expectations for higher prices don’t get out of hand.

“The risk of inflation remaining too high is greater than the risk of growth being too low,” he told the McLean County Chamber of Commerce in central Illinois. “Some additional firming of policy may yet be necessary to bring inflation back into the comfort zone within a reasonable period of time.”

In Moskow’s assessment, the Fed’s decision this month to keep the benchmark lending rate at 5.25% after 17 straight increases in two years doesn’t necessarily mean the central bank is done. Offering the most extensive explanation so far of that move, Moskow said it allowed more time to review financial conditions, economic growth and the housing market.

Atlanta Fed President Jack Guynn stopped short of saying more rate increases might be needed. “I am comfortable that policy seems to be, at the time of the last meeting, properly calibrated for my best forecast” of output and inflation, he told reporters after an Atlanta speech. Inflation is likely to recede in the “medium term,” he said.

The remarks from two of the longest-serving Fed policymakers may offer a window into debate at the last Fed policymaking meeting, the first of Chairman Ben S. Bernanke’s tenure to feature a dissenting vote, which came from the Richmond Fed’s Jeffrey Lacker. Economists had been the most divided in three years in predicting the meeting’s outcome of either a pause or an 18th straight interest rate increase.

The Fed will release minutes of the meeting Tuesday.

“Instead of it being a black-and-white debate, what it shows is the shades of gray,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. In addition, Bernanke is “more tolerant of diversity of views, even within the Board of Governors,” she said.