The Federal Reserve is unlikely to raise interest rates soon because the surge in global commodity prices should have a temporary impact on inflation in the United States, a key official said Monday the Fed.
Conversely, however, the Fed Chairman Janet yellen said prepared remarks that the US Central Bank would monitor closely the evolution of inflation to avoid the mistakes of the 1970s, when high oil prices have led to sharp increases in consumer prices.
The sharp increase in oil prices, grains and other commodities are "unlikely to have a permanent effect on inflation, consumers or derail the economic recovery and hence do not, in my opinion, justify any substantial change in the direction of monetary policy," Yellen said.
He spoke at the Economic Club of New York. The Fed's no. 2 official, an influential member of the policy setting Body of the Central Bank, there was a strong supporter of Fed loose monetary policy, including the controversial purchase of bonds that must be executed by June.
In recent weeks, a vocal minority of Fed officials warned here that the Central Bank may have to start raising interest rates later this year to keep prices in check. But it doesn't appear the most influential decision-makers in the Central Bank to share this view.
As long as inflation expectations will continue to remain stable, the increases seen so far in world commodity prices and headline inflation is unlikely to lead to a wage-price spiral seen in the past. Yellen said the Central Bank is better equipped to prevent the experience of the 1970s, when wages and prices spiraled upward as workers demanded compensation of earlier price rises and companies replied to higher labour costs with higher price rises.
Some regional officials Fed tightening policy that you want to prevent the construction of inflation, including President Charles plosser from the Philadelphia Fed, Richard Fisher from the Dallas Fed and narayana kocherlakota from the Minneapolis Fed. But the majority believes that it is not necessary because inflation is not a real threat and even the economy is still fragile.
Fed Chairman Ben bernanke last week downplayed inflation threats posed by higher commodity prices. Another influence Fed official made a similar case to Yellen on individual observations in Tokyo Monday. New York Fed President William Dudley, who is part of the rate setting Federal open market Committee, cautioned against raising rates in response caused by higher prices of commodities, such as the European Central Bank last week for inflation.
Yellen also highlighted another opposite impact higher gasoline and food prices, which could hurt economic growth by leading consumers to spend less and companies to cut back on investments. He said a sharp economic recovery is unlikely.
Recent economic data was mixed, with manufacturing jobs and gaining strength, while housing and consumer spending remains weak. Although the outlook is uncertain amid ongoing political turmoil in the Middle East and North Africa, and the uncertainty over financial policy at home, most economists predict growth to continue in 2011.
The US economic recovery is expected to gain momentum for the remainder of the year, despite a sharp pullback in growth during the first quarter-end only, according to economists surveyed by the Wall Street Journal.
With unemployment remains high and inflation is expected to remain low, the Fed is able to keep interest rates near zero and continue the bond market, Yellen said.
The $ 600-billion bond program, which began in mid-November and is set to run through June, aims to help the economy by keeping borrowing rates low, driving investors to more vulnerable assets such as stocks and lifting exportsmaintaining a low price of USD.
Critics and abroad accused the bond for fuelling a sharp increase in global commodity prices. But Yellen is stuck with the Fed that the increases driven by growing demand from rapidly developing economies such as China and the offer is less because of adverse weather conditions in some parts of the world.
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