WASHINGTON - Top Federal Reserve officials hammered home on Tuesday the US central bank's determination not to allow inflation to get out of control, cementing views that interest rates will rise later this year.
The remarks by two regional Fed presidents followed hard-line comments on Monday night from Fed Chairman Ben Bernanke that the Fed would "strongly resist" any deterioration in inflation expectations.
Dallas Federal Reserve Bank President Richard Fisher, one of the most anti-inflation members of the interest rate-setting Federal Open Market Committee after three dissents against steep rate cuts, echoed Bernanke.
"We want to make sure the message is clear ... that we will not countenance building inflationary expectations," he told the Council on Foreign Relations in New York.
A second policy-maker, Boston Federal Reserve President Eric Rosengren, also warned that inflationary pressures were being stoked by soaring energy and food prices, and after aggressive Fed interest rate cuts since September.
"The effects of significant increases in food and energy prices are still feeding through the economy, as are the impacts of appropriately aggressive monetary and fiscal policy responses to the recent financial turmoil," he said in a speech at a conference on Cape Cod hosted by the Boston Fed.
The remarks helped tilt odds in financial futures markets to an 80 percent likelihood that the Fed will hike its overnight fed funds benchmark by a quarter percentage point to 2.25 percent at its meeting in September. Investors see rates back at 3 percent by next March.
The Fed slashed borrowing costs aggressively to shield the US economy from a housing crisis after the collapse of the subprime mortgage market last year, which sparked a global credit crunch that has chilled US growth.
Fisher said he wanted to draw the line at 3.5 percent for benchmark rates and made plain that recent signals on inflation expectations were causing him some concern.
"The anecdotal evidence, the headlines that we're reading in the newspapers, and the survey data, is not encouraging," he told his audience in response to a question.
"That worries me a great deal. It's beginning to work its way into expectations, and when you begin to work your way into expectations, business and consumers behave accordingly and then you have a problem.
"So you want to make sure that is not encouraged and we will do the level best we can to do so," he said.
The Fed's last rate cut was accompanied by a statement clearly hinting that the easing campaign had been paused while policy-makers waited for the benefits of lower borrowing costs to filter through into the economy, and as emergency Fed steps to calm spooked financial markets healed frayed nerves.
Since then, the Fed has also noticeably stiffened its rhetoric in support of the dollar, which notched record lows against the euro this year as the US central bank slashed rates while the European Central Bank stayed on hold.
Foreign exchange market conditions will be reviewed by finance ministers and central bank chiefs of the Group of Eight rich nations at a meeting in Japan this weekend.
In advance of this gathering, remarks by ECB President Jean-Claude Trichet that euro zone borrowing costs may in fact have to rise have buffeted the dollar further. But Fisher dismissed talk that the Fed and ECB were at odds over policy.
"I admire Trichet's emphasis on price stability. We are not competing against the Europeans," he said.