St. Louis Fed's Poole says US economy 'limping along,' sees no recession

Wed, Feb 20 2008, 19:10 GMT
http://www.afxnews.com

WASHINGTON (Thomson Financial) - Unemployment is a far larger concern than inflation -- at the moment -- but it is possible the Federal Reserve could avert a significant recession this year, only at the cost of high inflation farther ahead, St. Louis Federal Reserve Bank President William Poole warned today.

There's no question the risk of recession predominates now, Poole said, "but my reading of economic history is that we generally live to regret a monetary policy focused exclusively on the number one economic concern of the day."

The US economy is just "limping along," he said. While some people think a recession has already started, others, including himself, "believe the economy will skirt recession."

However, the difference between a little growth and a little contraction may not look or feel much different to most people.

In his speech on "Inflation Dynamics" delivered at Truman State University in Missouri, Poole said that while risk management is an important strategy, "taking out insurance against certain risks is not free."

The potential cost of insurance now is that "policymakers could pursue a powerfully expansionary policy to all but eliminate the possibility of a significant recession in the year ahead, but doing so would come a the cost and even likelihood of an unacceptable increase in the rate of inflation."

Poole was careful to say the Fed had not gone too far as yet, that he was "willing to quibble on details, and have, but not on fundamentals."

His warning is about preserving the Fed's longer term inflation fighting credibility which is "a crucial factor, perhaps the most crucial factor" in keeping inflation under control.

Over the last fifty years, Poole thinks, it is consumer and business inflation expectations that have trumped any other cause of long-running inflation episodes, more than high energy, more than low unemployment.

As the economy stands at this moment, there is "substantial stability" of inflation expectations, Poole believes, and "recent relatively small increases in inflation are apparently due to transitory factors."

However, that could be about to change. "Could it be that there are now trends in place in the relative prices of food and energy?" Poole asked. "I am not prepared to dismiss possibility," he said. The speed of economic development in China, India and other emerging markets could mean higher demand for both for some time.

In the Fed's policy making, it should not focus on the food- and energy-excluding core rate so much that it "inadvertently accommodates an increased inflation trend."