Inflation Troubles Fed’s Kohn
Federal Reserve Board Gov. Donald Kohn, the nominee to be No. 2 at the U.S. central bank, said Thursday that elevated inflation readings had raised a “warning flag” that demanded the attention of policymakers.
“I have found the recent inflation data somewhat troubling,” the central bank veteran told the Senate Banking Committee at a hearing on his nomination to be Fed vice chairman. “They were higher than I had anticipated and that raises a warning flag that something might be in train.
“Yes, the economy is slowing down and that will help to dampen inflation pressures, but at the same time, there are some danger signs out there that we need to be quite attentive to,” he added.
The remarks were the latest in a string of hawkish Fed comments that have nearly cemented expectations in financial markets that a 17th consecutive quarter-percentage-point interest rate hike is in the cards when Fed policymakers gather on June 28 and 29. This would take U.S. benchmark overnight borrowing costs to 5.25%.
Kohn, who served as a top advisor to former Fed Chairman Alan Greenspan before being elevated to the bank’s board in August 2002, is widely seen as a safe pair of hands and he is expected to easily win the needed Senate confirmation for a four-year term as vice chairman.
Kohn’s comments came as the White House on Thursday raised its forecast for U.S. economic growth in 2006 but offered a more pessimistic view of inflation.
In its midyear economic report, the administration predicted gross domestic product would grow by 3.6% this year, faster than the 3.4% rate the White House forecast in December.
The report also showed a higher pace of inflation, with the consumer price index expected to rise by 3%, up from a previous forecast of 2.4%.
Separately, the government said the number of laid off workers filing claims for unemployment plunged last week by the largest amount in eight months, but it might have been a statistical fluke.
The Labor Department reported Thursday that 302,000 people filed for benefits last week, down 35,000 from the previous week. Analysts had expected a decline of about 6,000.
It was the biggest one-week improvement since jobless claims fell by 65,000 during the week ended Sept. 24. During that period, claims figures were buffeted by massive layoffs from the Gulf Coast hurricanes.
Analysts cautioned against reading too much into last week’s improvement. They noted it occurred during a holiday-shortened week when residents of many states would have had one fewer day to file their applications for benefits.
In a separate report, the Commerce Department said inventories at U.S. wholesalers rose 0.9% in April, more than expected, with automotive stocks increasing the most in 10 months and inventories of machinery and metals up sharply.
