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Fed Policy Makers' Inflation Views Differ Ahead of Consumer Price Report

Federal Reserve policy makers aired their differences over how to tackle accelerating inflation before a report showed the cost of living in the U.S. rose in March for a ninth consecutive month.

Fed Governor Elizabeth Duke said in Washington yesterday that rising commodity costs aren’t resulting from U.S. monetary policy and don’t warrant higher interest rates, while Fed Governor Daniel Tarullo said he sees no sign of inflation spreading more broadly. Richmond Fed President Jeffrey Lacker and Philadelphia’s Charles Plosser indicated they’re more concerned about prices, with Lacker saying the central bank must tighten credit before inflation gains speed.

The comments highlight an emerging debate among Fed officials over what steps to take after completing $600 billion of Treasury purchases through June. Policy makers were divided at their last meeting on March 15, with a “few” officials saying tighter credit may be warranted this year, while a “few others noted that exceptional policy accommodation could be appropriate beyond 2011.”

Central bankers must validate expectations of businesses that inflation will remain low “by conducting monetary policy in such a way that inflation does not accelerate,” Lacker said yesterday at the University of Baltimore. “I believe we need to heed the lesson of the last recovery that inflation is capable of rising even if the level of economic activity has not returned to its pre-recession trend.”

Core Inflation

Another official, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said yesterday in Helena, Montana, that core inflation “is very low right now” and he doesn’t see many signs of price pressures.

Kocherlakota and Plosser vote on the policy-setting Federal Open Market Committee this year, while Lacker does not. Duke and Tarullo, as governors, have permanent votes.

The consumer-price index increased 0.5 percent for a second month, in line with the median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. Excluding volatile food and energy, the so- called core gauge rose 0.1 percent, less than forecast and restrained by lower clothing expenses and smaller gains in medical care.

Treasuries climbed today after the consumer-price report and on speculation that Europe’s sovereign-debt crisis may worsen, damping investors’ appetite for risk. The yield on the benchmark 10-year note fell to 3.44 percent at 12:28 p.m. in New York from 3.5 percent yesterday.

‘Extremely Doubtful’

“It’s difficult to see strong underlying inflation pressures,” Charles Evans, president of the Federal Reserve Bank of Chicago, told reporters today after a speech in New York. “While I’m monitoring inflation” and inflation expectations, he said, “I am extremely doubtful we need an adjustment in monetary policy.” He is a voting member of the FOMC this year.

Duke and Tarullo offered remarks that were closer to the views of Chairman Ben S. Bernanke’s top two lieutentants, Fed Vice Chairman Janet Yellen and William C. Dudley, President of the Federal Reserve Bank of New York.

Duke, 58, answering questions after a speech yesterday, said “it would not be helpful if monetary policy reacted to every move in a very volatile price. If we had raised rates and tightened up the economy in 2008, imagine how bad financial crisis might have been.”

Panel Discussion

Tarullo, 58, speaking separately at a panel discussion in the capital yesterday, said that “to this point at least we haven’t seen indications” that the recent increase in total inflation will “pass through into core inflation,” which excludes food and fuel.

Regarding the Fed’s $600 billion large-scale asset purchase program, “I don’t see any need to either terminate it prematurely or to increase it during its pendency, both of which have been articulated as options in our statements along the way,” Tarullo said.

Plosser, 62, took a different tack in a speech yesterday at the annual Hyman P. Minsky conference in New York, organized by the Levy Economics Institute of Bard College.

“The apparent strengthening of the U.S. economy suggests that, in the not-too-distant future, monetary policy will have to begin reversing course from a very accommodative policy stance,” Plosser said.

Regional Survey

The Fed said in its Beige Book report this week that the economy expanded at a “moderate” pace across much of the U.S. in February and March, led by manufacturing, with labor markets showing improvements in most regions.

The economy is “firmly in recovery mode, and the fundamentals for future growth are strong,” Lacker said. The pickup in consumer spending is “solidly grounded in improving fundamentals,” and business expansion “should make a significant contribution to growth this year,” he said.

Economists forecast the world’s largest economy will expand at a 2.9 percent annual pace this year, according to the median estimate of 74 analysts in a Bloomberg News survey conducted from April 1 to April 7. That compares with a 3 percent median projection in March.

The FOMC said at its last session March 15 that the economy is on a “firmer footing” and unanimously affirmed plans to buy the Treasuries through June. Bernanke will hold his first press conference following the FOMC’s statement on April 27.

The economy added a greater-than-forecast 216,000 jobs in March, and the unemployment rate fell to the lowest level in more than two years, marking a drop of a full percentage point over four months.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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