Fed's Poole Warns Rate Cuts Bring Inflation `Costs'

Bloomberg reports:

Federal Reserve Bank of St. Louis President William Poole said excessive cuts in interest rates aimed at averting a recession run the risk of accelerating inflation to an ``unacceptable'' level.

``Taking out insurance against certain risks is not free,'' Poole said in the text of a speech at Truman State University in Kirksville, Missouri. ``At any given time, policy makers could pursue a powerfully expansionary policy to all but eliminate the possibility of a significant recession in the year ahead, but doing so would come at the cost and even likelihood of an unacceptable increase in the rate of inflation.''

Poole's comments indicate a continued concern with inflation, even as Fed policy makers have identified a weakening economy as the greater risk. Reinforcing the anxiety was a Labor Department report today that consumer prices in the U.S. rose more than forecast in January.

Poole, who is retiring at the end of March, said today he won't attend the central bank's Federal Open Market Committee meeting March 18.

As Poole spoke, the Fed in Washington released new estimates for consumer prices this year. Inflation, excluding food and energy, will run at 2 percent to 2.2 percent this year, compared with a range of 1.7 percent to 1.9 percent that the Fed projected in October.

Bernanke's Focus

Fed Chairman Ben S. Bernanke, appearing before the Senate Banking Committee last week, indicated that policy makers are prepared to lower interest rates further to revive the economy as banks make it tougher to borrow.

``Further cuts in the target federal funds rate may or may not be appropriate,'' Poole said, adding the decision would be shaped by economic data in the weeks before the next meeting on March 18.

``The U.S. economy today is limping along,'' Poole said. ``Some believe recession is at hand; others, and I include myself in this group, believe the economy will skirt recession.''

In response to questions from the audience about a weaker dollar, Poole said ``not only is it impossible to forecast exchange rate movements, we can't even understand them after the fact.'' Disruptions in financial markets will be ``handled in due course'' as banks raise capital, he said, though homebuilders in the U.S. are in the midst of a ``depression.''

It's not often a Fed official uses the "D" word.