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September 11, 2006
BOSTON — Just as rising inflation erodes the credibility of Federal Reserve officials, so can high unemployment, St. Louis Fed President William Poole said Monday.
"Given the importance of high employment, a period of sustained excessive unemployment may create doubts about future policy and this uncertainty is a manifestation of impaired credibility," Poole said in prepared remarks to the National Association for Business Economics.
"There is a fine balance here," Poole added, noting that when joblessness rises, "policy makers need to be able to explain in credible fashion why the problem is not a consequence of a monetary policy mistake."
Poole's prepared remarks didn't address the economic and policy outlook. In a television interview Saturday, Poole said "to me, the inflation environment, although it has a bit of an edge to it and inflation over the last 12 months is higher than I would like, I believe that basically the situation is pretty well controlled."
The Fed last month kept the funds rate at 5.25 percent for the first time since mid-2004, after 17 straight quarter-percentage point hikes.
Though inflation measured by the personal consumption expenditures price index excluding food and energy remains above the Fed's understood comfort zone of 1 percent to 2 percent, the Fed expects a moderation in economic growth to restrain inflation over time. The Fed has a dual mandate of stable inflation and maximum sustainable employment.
At present, unemployment seems less an issue for the Fed. At 4.7 percent, the jobless rate sits at an historically low level, though the pace of payroll growth has softened in recent months, leading economists to expect the Fed will keep rates steady again when it meets next week.
Regarding inflation, Poole said the Fed's credibility is "essential" to stable long-term inflation expectations, and "the cost of restoring credibility makes clear the reason for not losing it."
Poole repeated his support of an inflation target. He noted that he has in the past offered a "personal" objective of "zero inflation, properly measured."
But Poole also added that Fed agreement "on an inflation objective, which some might express as a 'comfort zone of 1-2 percent inflation' is more important than which precise specification is selected."
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