For release: May 11, 2005

Contact:	Joe Elstner
	Office:	(314) 444-8902
	E-mail:	joseph.c.elstner@stls.frb.org
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	Charles Henderson
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Trends in Inflation, Economic Growth, Price Stability Continue at FOMC Center Stage: St. Louis Fed’s Poole

link to speech

St. Louis, MO. — Over the next 18 months or so, Federal Reserve policy-makers will be looking closely at three unfolding developments:

• Will inflation pressures continue to intensify or be a blip on a steady long-term
  outlook?
• Will the recent moderation in economic growth persist into mid-2005 or will the
  economy return to the glide path that the Federal Open Market Committee (FOMC) projected early this year in its Monetary Policy Report to Congress?
• At what point will the FOMC believe that its policy actions have been enough to maintain its price stability obligation?

Those were the key points emphasized by St. Louis Federal Reserve Bank President William Poole in a speech to the AAIM Management Association. “As I see it, there’s little reason why one should walk away from the output and inflation projections the FOMC presented to Congress in February,” said Poole. “The central tendency of the Board of Governors and Reserve Bank Presidents was that real GDP would increase by between 3¾ and 4 percent this year, and that core PCE inflation would most likely come in at 1½ to 1¾ percent. As the April employment report vividly showed, the data can sometimes turn on a dime. When we put it all together, we get a mixed picture that doesn’t require a fundamental change in the outlook.”

Poole noted that the Fed’s strategy for encouraging maximum sustainable economic growth has depended on maintaining stable prices. Forecasters, he said, were surprised by the pickup in inflation last year. “The CPI, the best known measure of consumer prices, rose by 3½ percent over the 12 months of 2004, about 1½ percentage points higher than forecasters expected,” said Poole. “Much of this error was due to unexpectedly higher energy prices. Still, when we strip out food and energy prices, we find that CPI ‘core inflation’ rose about 2¼ percent.”

Poole emphasized that in 2005, nominal interest rates haven’t moved in a manner that suggests the market is beginning to price in a larger inflation premium. “If anything,” he said, “yields on 10-year Treasury securities suggest just the opposite. Not only are they little changed since the first of the year, they are still below last June’s level when the FOMC first began its policy of bringing the federal funds target rate toward an equilibrium level. To me, that suggests that the market is confident of the FOMC’s resolve to keep inflation well-controlled.”

Poole said the only surprise he’s seen in the past year “is that there has not been a major surprise, except for energy prices.” At some point, he added, “we’ll almost certainly see some surprises in the data. What should not be uncertain, however, is the Fed’s ironclad commitment to maintaining price stability. Maintaining fundamental price stability is central to maximizing sustainable economic growth and the economy’s ability to adjust successfully to inevitable shocks.”

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