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Fed's Fisher Says `Inflation Virus' Must Be Stopped (In the News)

Oct. 26, 2005

Oct. 6 (Bloomberg) -- Federal Reserve policy makers must prevent an ``inflation virus'' from disrupting the U.S. economy, Dallas Fed Bank President Richard Fisher said.

Stocks fell as Fisher's comments added to concern the central bank will raise interest rates to damp inflation stoked by Hurricanes Katrina and Rita even as economic growth slows. The Standard & Poor's 500 Index fell 0.4 percent to 1191.49, bringing its decline for the week to 3 percent.

``We cannot let the equivalent of sclerosis block the arteries and disrupt the workings'' of the economy, Fisher said. ``Nor can we let the inflation virus infect the blood supply and poison the system.''

Prices paid by manufacturers rose by the most in 15 years, a survey this week showed. Energy costs have soared since the hurricanes knocked out refineries and rigs along the Gulf Coast, which accounts for 30 percent of U.S. crude oil production.

Alarm bells are also ringing in Europe, where central bank President Jean-Claude Trichet said today he's increasingly concerned about inflation and is prepared ``at any time'' to raise interest rates for the first time in five years.

Remarks by other Fed officials this week suggested that U.S. rates may be on the way up.

St. Louis Fed Bank President William Poole said it was ``reasonable'' for futures markets to bet on two more increases in the main Fed lending rate before the end of the year. Philadelphia Fed Bank President Anthony Santomero the same day said the central bank will have to continue ``shifting'' interest rates higher to curb inflation.

Crude Oil

The price of crude oil on the New York Mercantile Exchange rose to a record $70.85 a barrel on Aug. 30 and was trading at $61.36 a barrel today.

``Money flows are an economy's lifeblood, and the Federal Reserve's great responsibility lies in maintaining the cardiovascular system of American capitalism,'' Fisher, a voting member of the rate-setting Federal Open Market Committee, said in the speech.

He repeated earlier comments that inflation is moving toward the ``upper end of the Fed's tolerance zone.'' The Fed is being ``vigilant'' on inflation and ``watching this all very carefully,'' he told reporters after his speech.

Fisher has used metaphors before to describe Fed policy making. On June 1, he roiled markets when he said the Fed is ``clearly in the eighth inning of a tightening cycle.''

The central bank raised its main lending rate 11 times since June 2004, most recently with a quarter-point increase to 3.75 percent on Sept. 20. Federal funds futures contracts show traders see a 100 percent probability the Fed will raise the rate again Nov. 1.

Profit Squeeze

``Inflation robs us of all that we might otherwise produce with a sound currency,'' Fisher said today.

The Institute for Supply Management this week said its measure of prices for raw materials paid by manufacturers had the biggest gain since September 1990.

Clorox Co., the largest U.S. household-bleach maker, said on Oct. 4 that energy costs will cut profit this year and force it to raise prices on almost half its products in January.

``The question now is, will prices increase more broadly or will the economy slow as profits get further squeezed or will both happen simultaneously,'' Fisher said. ``And the honest answer is, I don't know. I do know that there is anxiety that surrounds this issue.''

Budget Deficit

There were signs of accelerating inflation before the storms. The U.S. personal consumption expenditure index minus food and energy rose 2 percent in August from a year earlier, the top of the 1.75 percent to 2 percent range forecast by the Fed.

Fisher said today the federal government's budget deficit is also a risk to the economy.

``The markets are becoming wary of deficits,'' he said.

Fisher, 56, became president of the Dallas Fed Bank in April and is the newest member of the FOMC.

Today's remarks are the second of three public talks Fisher is giving this week. Tomorrow, he will speak at 8 a.m. New York time, discussing trade at a conference at Baylor University in Waco.

To contact the reporter on this story:

Scott Lanman in Washington at slanman@bloomberg.net.

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