Fed confident of continued growth

The US economy is growing robustly despite a slowing housing sector, although inflation remains above the central bank's comfort level, two top Federal Reserve officials said today.

Making separate appearances at a business economics conference, Cathy Minehan and William Poole, heads of the Boston and St Louis regional Fed banks respectively, sounded relatively optimistic about the economic outlook.

But while Minehan focused more extensively on the softness emerging from a decline in home purchases, Poole appeared a bit more worried about the possibility that inflation could gallop outside the central bank's grasp.

Stressing the need to maintain Fed credibility, Poole said inflation was running above the range he would prefer to see, and said that if it did not ease over the next 18 months that he would rather "act earlier rather than later."

He later told CBNC Television that he had an open mind on whether interest rates needed to go up again.

"Rates have gone up. We have evidence that the economy is slowing. It looks like inflation is under control. Whether rates will need to go up more or not remains to be seen, based on arrival of new information," he said.

The Fed held rates steady at 5.25 per cent last month, ending a two-year string of 17 consecutive rate hikes, on views slowing US growth could help alleviate price pressures. Financial markets expect the Fed will stay put again at its next policy meeting, on September 20.

Poole will get to vote on rate decisions starting in October if he temporarily takes over a spot at the Federal Open Market Committee meeting for Jack Guynn of the Atlanta Fed, who retires at the start of next month.

Poole would vote in Guynn's stead until a successor is named. In any case, he has a vote on the FOMC next year under normal vote rotation procedures.

Poole also touted US growth prospects, saying strong business investment suggests the economy is weathering a housing downturn rather well.

"The economy is not fragile -- it is robust," said Poole, although he added this was "not to say we couldn't have a weak quarter or two."

Other policy-makers have warned a weak housing market was a risk to the wider economy. But Poole sounded more comfortable, in a possibly coded warning that slower economic activity might not contain price pressures by as much as expected.

"The emphasis on housing is a bit overdone. If you look at housing as a fraction of total employment, it is about 2-1/2 per cent... So let's not be fixated on housing. It's not all that is going on," he told CNBC.

Stock market investors took some comfort from Poole's assurance that the economy was in robust shape and his remarks helped US share prices stabilize in afternoon trade.

Bond market investors, on the other hand, found his remarks a little too evenly balanced over the direction of future policy to take much notice. Minehan also straddled the fence, saying the risks of both slower growth and higher inflation had increased in recent months.

On the inflation side, Minehan said she expected price growth to recede over the coming year as the economy softened to a growth rate a bit under 3 per cent.

But she acknowledged that a sharp drop in recent housing data could lead to a greater retrenchment in consumer spending than is currently expected.

"The Bank's baseline forecast assumes a continued moderate downturn in residential construction," she said. "But recent data on declines in starts and permits, gloomy assessments by builders, the potential for higher mortgage rates, and increased inventories of unsold homes, remind me that this assessment could well be optimistic."

At the same time, she also warned against the possibility that inflation expectations among consumers and businesses could rise, urging policy-makers to remain vigilant.

Still, she predicted softer growth would eventually bring down core inflation to more acceptable levels, saying that part of the recent spike in prices had been due to the passing on of energy price spikes.

"If energy prices stabilize as is indicated in futures markets, then core inflation will subside," she said.

- REUTERS