–Individual Price Rises Do Not Signal Incipient Inflation
–Best Policy To Pursue Low, Positive Inflation Rate Long Term
–Moderate Pace Of Growth Will Be Sustained In 2011

By Brai Odion-Esene

WASHINGTON (MNI) – The goal of monetary policy is not to address
individual price movements, but to manage the overall direction and pace
at which all prices across the economy change, Atlanta Federal Reserve
Bank President Dennis Lockhart said Tuesday.

In prepared remarks to the Calhoun County Chamber of Commerce in
Anniston, Alabama, Lockhart defended the Fed against those who believe
the reason for the recent rise in prices around the world can be traced
back to actions by the Federal Open Market Committee.

In his remarks, Lockhart sought to differentiate between the rise
in prices and cost of living — which is going on right now — and
inflation.

“For the moment, inflation, properly defined, is tame, in my view,”
he said. “And the rise of individual prices does not signal incipient
inflation.”

Lockhart argued that monetary policy is not about preventing
relative price adjustments dictated by market forces. “It is about
controlling the broad direction and pace of change of all prices across
the economy,” he said.

What inflation is not, he said, is the rise of individual prices or
the rise of categories of prices.

He said that to understand the intent of current policy, to form
reasonable expectations, and to make sound decisions for the long term,
“the attention should be mostly on the full picture of inflation and the
long-term purchasing power of our money.”

He believes an exact fix on the state of inflation is elusive in
the short run, meaning “the best policy approach, in my opinion, is to
pursue a low, but positive rate of inflation over the longer term.”

Lockhart added that as a policymaker, “I think of the desirable
level of inflation as high enough to provide a cushion of safety against
the risk of tipping into deflation but low enough to be largely
irrelevant-not a consideration-in long-term decision making. For me,
this number is around 2%.”

According to Lockhart, despite the energy-fueled jump in prices in
December, underlying inflation is currently below what he would define
as price stability. He projected underlying inflation to gradually rise
over the next few years, and should be in a range consistent with the 2%
target by 2013.

As for how the Fed’s price stability mandate and the price
increases households are experiencing, Lockhart stated:

“The Fed … is powerless to prevent fluctuations in the cost of
living and increases of individual prices. We do not produce oil. Nor do
we grow food or provide health care. We cannot prevent the next oil
shock, or drought, or a strike somewhere -events that cause prices of
certain goods to rise and change your cost of living.”

On the economy, Lockhart said it continues to improve and the
moderate rate of growth will be sustained as the year progresses.

The jobs picture will remain a source of frustration, however, and
while the unemployment rate will fall over the coming years, “I think it
unlikely that jobs growth this year will be strong enough to generate
quick improvement,” Lockhart concluded.

** Market News International Washington Bureau: 202-371-2121 **

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