Fed President: Inflation on Right Track

NEW YORK (AP) -- Federal Reserve Bank of St. Louis President William Poole sounded an optimistic note on the inflation and growth outlooks Friday, but warned that unexpectedly strong growth could spur the central bank to raise interest rates again.

"Recent inflation data themselves, and other information relevant to judging the inflation outlook, suggest that the inflation rate is likely to fall into a reasonable range this year," Poole said.

"Clearly, the momentum seems to be headed in a favorable direction, as last week's (Federal Open Market Committee) press release noted," Poole said. But he cautioned that "before we declare victory and head home" it's worth keeping in mind that "we might be underestimating the likely pace of economic activity," or labor productivity may turn out to be lower than now forecast.

"If we get an upside surprise on (gross domestic product) growth, then monetary policy may have to be tightened somewhat," Poole warned. Also, if the level of core inflation "seems to be settling at a rate above 2 percent, then such an outcome would be unacceptable to me," he said, adding "I put a very high weight on the Fed's responsibility to maintain low and stable inflation."

Poole's comments came in a speech prepared for delivery before the AAIM Management Association in St. Louis. Poole is a voting member of the interest rate-setting Federal Open Market Committee this year.

In recent comments, Poole has been one of the more dovish members of the central bank, and has indicated on several occasions that the outlook facing monetary policy makers was "symmetrical," in that events could transpire that could cause interest rates to be raised, held steady or lowered. Other Fed officials have been more hawkish and simply threatened rate increases if inflation did not fall. In his speech, Poole offered few clues into his outlook for monetary policy over 2007.

For the most part, Poole's economic outlook was upbeat on growth, and he said the worst of the trouble in the housing sector may be over. But he also warned that the data can often be surprising.

In his speech, Poole offered up his preferred inflation environment. "My commitment, certainly, is to do what I can to promote policy adjustments that will yield an inflation outcome, on average over a period of several years, centered on 1.50 percent," as measured by the core personal consumption expenditures price index, he said.

Poole said "by some indicators, the housing market is beginning to show signs of stabilizing," even as "we must recognize that the housing market is not out of the woods yet." The prime challenge facing home builders is a backlog of unsold homes and numerous cancellations of orders. Also, "at a minimum we can say that we do not have evidence as yet that home prices have stabilized," Poole said.