Inflation Fears Continue to Occupy Policy Makers

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As the second quarter draws to a close, inflation is creeping up. David Wessel, deputy Washington bureau chief of The Wall Street Journal, talks with Steve Inskeep about the possibility of the Federal Reserve raising interest rates to squash inflation before it booms.


On Fridays, the business report focuses on your money, and this morning the question of how much you're going to have to pay to borrow some.

Here are some things the Federal Reserve is pondering as it considers whether to raise interest rates at the end of this month. The U.S. economy is slowing down, and the U.S. inflation rate is creeping up. To find out why and what that means, we turn to David Wessel, Deputy Washington bureau chief for the Wall Street Journal, regular guest here.

David, good morning.

Mr. DAVID WESSELL (Deputy Washington bureau chief for the Wall Street Journal): Good morning.

INSKEEP: So how is the economy doing?

Mr. WESSELL: Well, the economy is, as you said, slowing down. We had a lousy fourth quarter, partly due to Katrina. Then we had this incredible surge of growth in the first quarter, more than 5 percent. And the quarter that ends at the end of June looks like about a 3 percent quarter. But a lot of economists think it might be as little as 2 and a half percent.

So the question is, is the economy slowing to some safe speed, or is it slowing so much that we're about to see the unemployment rate start to turn up again?

INSKEEP: Well, if people are worried that the economy is slowing down too much, why would the Fed even think about raising interest rates, which is something you do to slow down the economy?

Mr. WESSELL: I think their current thinking is this: that their most important job is to prevent inflation from getting out of bed. It hasn't been an issue for the past couple of years. Alan Greenspan is gone, and the new leadership doesn't want inflation to raise out of bed on its watch.

INSKEEP: Let's be brutally frank about this. Are you saying that Ben Bernanke, the new Fed Chairman, would have to consider his own credibility more important than the short-term health of the economy?

Mr. WESSELL: I think Ben Bernanke would say that the long-term health of the economy depends on him establishing his credibility as an inflation fighter, and if they don't get the inflation fears out of the system right now, the risk is that he'll have to raise rates even higher in the future and risk a recession.

But we are paying a price for the fact that there was a transition at the Federal Reserve to a new guy who's stumbled a little bit in some of his rhetoric, and as a result is forced to establish his anti-inflation credibility by raising rates a little higher than perhaps Alan Greenspan would have in the same circumstance.

INSKEEP: Just to keep things in perspective here, what's the inflation rate right now?

Mr. WESSELL: The inflation rate right now is roughly around 3 percent. If you include food and energy, it's a little bit higher. If you take food and energy out it's a little bit lower.

The problem right now is not today's inflation rate. What the Fed is saying is, we don't want to do anything right now that gets people to think that inflation's going to get worse. So they're saying if we're tough now, maybe we can kill it before it infects the system.

INSKEEP: Is there a risk of looking in the rearview mirror here and attacking inflation that has already happened in the recent past and isn't happening now?

Mr. WESSELL: Absolutely. I mean, I was talking to some Fed officials at a conference last week and they expressed concern just about that fact, that they knew that inflation was going to pick up now. It was inevitable because of what happened to oil prices and the fact that the economy is a little bit stronger and they want to make sure that it doesn't get built into what they call inflation expectations.

Recently, since they began talking tough about inflation, these surveys of inflation expectations or the market measures of inflation expectations, have sort of improved a little bit, and the Fed has to decide, well, have we done enough with our rhetoric, or do we have to raise interest rates once or twice more to convince people that we're really not going to let it get out of control?

INSKEEP: David Wessell of the Wall Street Journal, thanks very much.

Mr. WESSELL: A pleasure.

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