Sunday, May 25, 2008

Fed researchers say rate cuts risk spurring inflation

The following appeared on page 2C of the Saturday May 24, 2008 issue of the St. Paul Pioneer Press.

The Federal Reserve's interest rate reductions risk "unhinging" long-term market expectations for monetary policy and inflation, according to researchers at the Fed's district bank in Minneapolis.

Expectations for the stability of long-term interest rates are "particularly relevant given the recent conflict at the Fed between fighting rising inflation and stimulating a potentially stagnating economy," Andrew Atkeson, a consultant to the bank, and monetary adviser Patrick Kehoe wrote in a paper that appears on the Minneapolis Fed's Web site.

The economists echoes concerns of Fed district bank presidents, in cluding Richard Fisher of Dallas and Charles Plosser of Philadelphia, who recently said the central bank should avoid fueling inflation while trying to revive bank lending and economic growth following the collapse of the subprime-mortgage market.

Plosser and Fisher dissented from the decision by the central bank last month to pare the target rate for overnight loans between banks by 0.25 percentage point. The Fed has cut the rate by 2.25 percentage points to 2 percent this year in the most aggressive reductions in two decades.

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