April 2 (Bloomberg) -- St. Louis Federal Reserve Bank President William Poole said he would have a ``high hurdle'' for favoring interest-rate cuts if inflation stays near the current pace.

``There would have to be a high hurdle for me to want to be cutting rates if the economy is only marginally and tentatively on the weak side'' and inflation isn't slowing toward 2 percent, Poole said after a speech in New York today.

Fed Chairman Ben S. Bernanke and fellow policy makers said last month they were more concerned about bringing down inflation than about the economy faltering. Poole reiterated that his goal for inflation is 1.5 percent, plus or minus 0.5 percentage point.

``Our economy is fundamentally sound,'' Poole said in his speech to the National Association for Business Economics New York Chapter. ``Putting aside near-term uncertainties, mostly related to housing and housing finance, economic activity is growing at approximately the same rate as potential.''

Poole's comments on inflation differed from the text of his remarks distributed to reporters by the St. Louis Fed beforehand. In that version, Poole said ``inflation is retreating as energy prices stabilize.'' The St. Louis Fed chief told reporters later that that was a previous draft.

Poole voted with all other members of the Federal Open Market Committee last month to leave the benchmark lending rate at 5.25 percent. The FOMC removed a tilt toward higher interest rates in its March 21 statement, giving itself flexibility to respond to shifts in economic data.

Fed Statement

The Fed bank president said the statement wasn't a complete success because observers had differing interpretations of the change in language. The Fed dropped reference to the chance of ``additional firming'' in rates, while stating that inflation was the ``predominant concern.''

``There is a problem when well-informed people in the market come to different conclusions from the same language,'' Poole said. ``That tells you that the statement is not completely clear.''

Most of Poole's speech discussed his thinking on rule-based monetary policy. The 69 year old said he has long favored a specific inflation target for the U.S. central bank.

Poole noted that forecasters estimate a continuing expansion with ``the economy's output during the next two years remaining near potential, with a growth rate of approximately 3 percent.''

He said there is a ``slightly elevated'' risk of a recession. He estimated that chance as something between former Fed Chairman Alan Greenspan's assessment of a one-third risk and a normal probability of 10 percent to 15 percent.

Fed Communication

Poole, citing the consensus among economists, said that monetary policy takes up to a year to affect prices, making it important that policy makers ``reconcile near-term movements in inflation'' with price changes over the longer term. He also said that ``when policy departs from the usual practice, it is incumbent that policy makers communicate the change -- its nature and rationale -- carefully to the public.''

Bernanke has asked the FOMC to study how it can be more transparent to the public. Officials are now one year in to their deliberations.

The Fed chairman and the Board should form a consensus around a low inflation rate, Poole said. Next, they should develop a regime for achieving that goal, and, third, communicate this framework to the public.

``Rule-like behavior must be adopted by policy makers in the first place before it can be communicated to the public,'' Poole said.

Inflation Target

Poole restated that he favors a 1.5 percent inflation rate, measured by the Commerce Department's personal consumption expenditures price index, minus food and energy, with a 0.5 percentage point cushion on either side.

The index has been at or above the top of that range since March 2004. Bernanke told the Joint Economic Committee of Congress last week that inflation was ``uncomfortably high.'' He put the blame on rents and commodity prices, rather than aggregate demand fueled by the Fed's falling ``real'' interest rate. Real rates are adjusted for inflation.

The core PCE index rose 2.4 percent for the year in February and the three-month annualized rate accelerated to 1.9 percent, from 1.5 percent in January.

Poole is a former economics professor at Brown University in Providence, Rhode Island. He joined the St. Louis Fed as its president in 1998.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: April 2, 2007 15:41 EDT