Fed Inflation Hawks Warn More Stimulus Could Fuel Prices

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Federal Reserve Bank of Dallas President Richard W. Fisher.

Are inflation hawks preparing to take flight? That’s the sense one gets reading comments made by two U.S. central bank officials Tuesday, including Dallas Fed President Richard Fisher, who said that corporate chiefs have been sounding the alarm about an increase in prices thanks to the Fed’s easy money policy. Fisher’s latest remarks are sure to fuel a growing debate about whether the Fed should embark on another round of monetary stimulus, especially in light of last month’s lackluster jobs report.

Speaking at the University of Oklahoma’s Price College of Business, Fisher said that he’s heard from business leaders who are concerned that the Fed’s easy money policy could raise inflation, which would increase prices for companies just as they’re trying gain a solid footing. “I’m just reporting what I hear on the street, which is a real concern that with our expanded balance sheet, we are just a little bit in an ember of what could become an inflationary fire,” Fisher said in comments cited by Bloomberg. He said business leaders are telling him, “Please, no more liquidity.”

Separately, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said that the threat of inflation means that the central bank will likely have to begin to reverse its easy money policy as early as the end of the year. “Conditions will warrant raising rates some time in 2013 or, possibly, late 2012,” Kocherlakota said in comments cited by Reuters. That puts Kocherlakota at odds with the policy-making Federal Open Market Committee, which has said since January that it plans to keep interest rates low through 2014.

(More: QE3 Watch — Will Slowing Jobs Picture Spur More Fed Stimulus?)

Fisher and Kocherlakota are well-known inflation hawks, which means they tend to worry more than other policy-makers about the risk that inflation poses to the economy. So it’s not surprising that Fisher, in particular, would voice business leaders’ concerns that inflation could make buying the materials — or inputs — they need to run their companies more expensive. Although both officials are considered to be more hawkish than Fed Chairman Ben Bernanke, their comments could put pressure on their colleagues to resist calls for a third round of quantitative easing, or QE3, something the Fed policy makers have left on the table if the economy loses momentum.

For now, inflation remains under control: as of February, prices had risen 2.3% over the previous year, according to the personal consumption spending index, just slightly above the Fed’s target rate of 2%.

Neither Fisher nor Kocherlakota are among the five Fed presidents voting on the FOMC this year, which may explain their outspokenness. Fisher is the more hawkish of the pair. He’s called the idea of more monetary stimulus a “fantasy of Wall Street,” while Kocherlakota has allowed that “if the outlook for inflation fell sufficiently and/or the outlook for unemployment rose sufficiently, then I would recommend adding accommodation.”

(MORE: Is It Time to Start Worrying About Inflation Again?)

The Fed has already cut its benchmark interest rates to near zero to make it easier for companies to borrow money to invest. The central bank has also purchased over $2 trillion worth of bonds in an effort to increase liquidity. But injecting money into the system runs the risk of inflation, which could hurt businesses. On the other hand, some have argued that a little inflation might actually benefit the economy. For the moment, inflation is under control, not least of all because U.S. economic growth remains modest, which is why policy-makers are focused on conditions six months to two years from now.

Last month’s weaker-than-expected job report raised the prospect of a third round of Fed bond-purchases. The Bureau of Labor Statistics reported that the economy added 120,000 jobs in March, compared to the 205,000 that analysts, on average, had been expecting, a sign that the employment gains of recent months could be losing steam. But Fisher downplayed the report, saying that policy can’t be based on one data point.

The Federal Reserve is in a delicate position right now. The economy is growing and unemployment is falling — but neither by enough for the Fed to rule out another round of action. On the other hand, after two rounds of massive stimulus that has fueled a bloated balance sheet, and a lengthy period of very low interest rates, it’s clear that the inflation hawks are getting a little nervous. For now, they’ve been unable to sway the conventional wisdom. Hopefully, they won’t end up being canaries in the coal mine.

MORE: America’s Slow Economic Recovery

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