CHICAGO, Nov 20 - Chicago Federal Reserve President Michael Moskow said on Thursday that even with strong economic growth next year, inflation is unlikely to pick up significantly, suggesting Fed policy can remain accommodative. "Even though growth last quarter was exceptionally strong, we are still likely quite a ways from seeing the kinds of pressure on labor and capital resources that often signal an increase in inflation," Moskow told the Chicagoland Chamber of Commerce. Moskow, a voting member of the Fed's policy committee this year, said labor markets are still "a key area of weakness" with payrolls more than 2.0 million below their peak in 2001, and there are still "appreciable amounts" of excess capacity in some industries. He said the economy needs to grow faster than its potential for a time, to use up excess slack in the economy and "neutralize" downward pressure on inflation. "Despite recent strengthening in activity, the level of actual output is still well below the level of potential output, so there is still an output gap.
"Today, part of the Fed's policy challenge is to help stimulate economic activity in order to close this output gap," he said. He forecast economic growth will be above potential growth of 3 percent to 3.5 percent through the end of 2004, but even this outlook did not suggest inflation worries on the horizon. That fits with comments from other Fed officials in the past couple of weeks that they are in no rush to raise official interest rates, even with strong economic growth, because inflation is still so low. The central bank has kept the benchmark federal funds rate at a 45-year low of 1.0 percent since June, and financial markets expect no increase until the spring at the earliest. "Even though the outlook calls for strong GDP growth, so long as the output gap persists and there are diminished pressures on resources, inflation rates are unlikely to increase significantly," Moskow said. He said the Fed's ability to keep monetary policy accommodative, or supportive of growth, should help keep borrowing costs for consumers and businesses at low levels. Moskow was optimistic that growth will remain solid, and said the "general tone" of anecdotal reports from businesses is noticeably better than it was a couple of months ago. But he did sound one note of caution that pockets of inflationary pressure could emerge in certain sectors, if unused resources did not move efficiently to areas where demand was strong. While that risk bore watching, the Fed official reiterated the central bank's expectation that the probability of a fall in inflation is higher than an increase.//