Poole sees moderate growth, falling inflation in '07

Feb 9, 2007

WASHINGTON (MarketWatch) -- The U.S. economy should grow at a sustainable pace while inflation should continue to decline, said William Poole, the president of the St. Louis Fed bank, in a speech presenting his outlook on Friday.
"As I step back and survey the economic landscape, I see an economy that appears to be transitioning quite nicely from last year's slow patch, to more sustainable growth," Poole said in a speech prepared for delivery to the AAIM Management Association in St. Louis.
Poole, a voting FOMC member this year, is one of three top Fed officials discussing the economic outlook on Friday. Next week, Fed chief Ben Bernanke will deliver the Fed's formal economic forecast to Congress when he testifies on Fed monetary policy.
Financial markets pay close attention to speeches by the St. Louis Fed president. A recent study of market impact of Fed speakers listed Poole as the second most market-moving Fed official after Bernanke.
In his speech, Poole was upbeat on growth and inflation. He said the economy was fundamentally sound and that past Fed actions had kept inflation largely in check.
In common with speeches recently from other top Fed policy makers, Poole said there were tentative signs that the housing market was stabilizing, but he was very cautious not to declare victory. Housing was a significant drag on GDP growth in 2006.
"While recent data seem to point in a favorable direction, we must recognize that the housing market is not out of the woods yet," Poole said.
Most importantly, there is no evidence that home prices have stabilized after pervasive weakness last year, he said.
Poole said inflation was headed in the right direction and should fall into a "reasonable range" this year.
But Poole said he would fight for higher rates if core inflation "seems to be settling at a rate above 2%.
Poole said he detected a "firmer tone" in the most recent economic data.
Poole also said more rate hikes may be needed if growth in 2007 comes in stronger than expected.
Poole presented his personal inflation target, saying he would "do what I can to promote policy adjustments that will yield an inflation outcome, on average over a period of several years, centered on 1.5% on the core PCE price index."
Greg Robb is a senior reporter for MarketWatch in Washington.