(Bloomberg News) Federal Reserve Bank of San Francisco President John C. Williams said a period of high inflation is "very unlikely" because rising commodity prices spurred by global demand aren't likely to keep climbing.
"The economy today faces many pitfalls, but I don't believe that runaway inflation is one of them," the regional bank chief said today in the text of his first policy speech as a central bank official. Even so, "one of the most important policy questions we are grappling with at the Fed has to do with inflation."
Williams, a former research director who became president in March, used the speech in Los Angeles to defend the Federal Open Market Committee's policies, saying recent economic data have been "lackluster" and the U.S. is still trying to regain millions of jobs lost in the recession. Companies last month added fewer workers than anticipated by economists surveyed by Bloomberg News, and service industries expanded at the slowest pace in eight months, according to reports released today.
The economy faces "persistent headwinds" such as high gasoline prices and a "severely depressed" housing market, yet "has enough forward momentum to overcome" them, Williams, 48, said in remarks to Town Hall Los Angeles, a nonprofit group that hosts speakers. The U.S. should grow more than 3% in the current quarter, up from a 1.8% rate estimated for the first three months of the year, he said.
Policy makers, after meeting in Washington last month, stood by their commitment to complete a $600 billion Treasury- securities purchase program aimed at boosting the recovery. They also released lower forecasts for economic growth this year and raised estimates for a key gauge of inflation that excludes volatile food and energy prices.
Estimates for Growth
The range of estimates for growth this year was cut to 3.1% to 3.3%, from 3.4% to 3.9% in January. Estimates for the personal consumption expenditures index, minus food and energy, ranged from 1.3% to 1.6%, up from a prior range of 1% to 1.3%.
"I view a sustained period of high inflation as very unlikely," said Williams, who votes on policy next year, adding that the inflation rate should peak in the middle of the year before returning to an annual level of 1.25% to 1.5%. "If we sees signs of it developing, then we will act quickly and we will act decisively to ensure price stability."
Rising commodity prices are the result of global supply and demand and are unlikely to rise over the long term, he said. They represent only a "small portion" of the cost of finished goods and long-term inflation expectations are still stable, Williams said.
Wage-Price Spiral
In addition, the wage-price spiral that existed in the 1970s is "largely absent today," he said, adding that Fed policies are unlikely to account for more than "a very small portion" of commodity-price increases.
Fed officials left the benchmark interest rate in a range of zero to 0.25%, where it's been since December 2008, and said they're likely to keep it there for "an extended period."