Economy Lab

On prices, central bankers are people, too

Washington — The Globe and Mail

Storm clouds gather over the U.S. Federal Reserve Building before an evening thunderstorm in Washington in this June 9, 2006 file photo. (Reuters)

It looks like central bankers read their reviews.

"Contrary to popular opinion, Fed officials actually do eat and fill up their gas tanks," Atlanta Federal Reserve Bank President Dennis Lockhart said Monday in a speech.

Inflation is a sensitive subject around the Fed these days. As food and gasoline prices rise, there's a reflex action to assume inflation is on the rise. And it is - only not in a way that concerns Mr. Lockhart.

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Mr. Lockhart did more in his speech than declare that "central bankers are people too!" He explained how he interprets the mandate of the policy-setting Federal Open Market Committee: "To control the inflation rate we all experience - the so-called headline inflation. In other words, I interpret the Fed's price stability mandate as requiring the FOMC to manage the growth rate of the average of all prices, including food and energy."

(Mr. Lockhart currently lacks an official seat on the committee, although he does attend policy meetings, during which he would be given the opportunity to influence opinions.)

Like the majority at the FOMC, Mr. Lockhart is of the view that inflation is only just getting back to a rate that allows the Fed to stop worrying about deflation, or declining prices. He told the Rotary Club of Atlanta that he doesn't expect oil and food prices to drop.

"I'm distinguishing here between the rate of inflation and the level of prices," he said. "These higher costs are a result of real growth in emerging economies, developments in the Middle East and North Africa, and the fallout from natural disasters around the world…the pain of having to allocate a larger share of your income to driving your car or preparing dinner may well persist."

But persistent pain is different than inflation. If the rate of growth of prices slows, as Mr. Lockhart expects, then inflation eases - which would allow the central bank to maintain looser borrowing costs.

Mr. Lockhart quantifies the Fed's inflation mandate as achieving an annual inflation rate of around 2 per cent over a period of about three or four years. So he's willing to accept short-term jumps in prices. He said he's confident the Fed is on track to achieve that target. That suggests he's fine with letting the Fed's $600-billion (U.S.) asset-purchase program run its course through to the June deadline.

So there you have Mr. Lockhart's position on what is becoming the main question in financial markets: When will the Fed stop its quantitative easing program?

On Monday morning, Wall Street analysts' daily notes were full of commentary about St. Louis Fed President James Bullard's remarks on the weekend. Mr. Bullard, speaking at a conference in France on the weekend, said "if the economy is as strong as I think it is, then it may be a reasonable to send a signal to markets that we're going to start withdrawing stimulus."

Mr. Bullard's lack of equivocation got the attention of market participants. For the next month, until the FOMC's next policy meeting on April 26-27, expect an even greater parsing of Fed officials' comments than usual. Mr. Bullard's remarks show the Fed is giving serious thought to calling an early end to quantitative easing; Mr. Lockhart's comments suggest officials are still inclined to stay the course - for now.

"Like my colleagues on the FOMC, I continuously monitor performance against our price stability objective," Mr. Lockhart said. "I am prepared to support a change of policy if evidence accumulates that the low and stable inflation objective is at risk."

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