Poole Says Fed Should Raise Rates `Sooner,' Not Later

By Kathleen Hays and Timothy R. Homan

June 17 (Bloomberg) -- Former St. Louis Federal Reserve President William Poole urged U.S. central bankers to raise interest rates to head off an inflation spiral as energy costs soar.

``We should be moving sooner rather than later'' on increasing borrowing costs, Poole, who retired in March, said in an interview today with Bloomberg Television. ``I don't think you can interpret what's happening with energy as a temporary shock.''

Poole warned that the Fed must prevent higher inflation expectations from feeding through to a surge in wages. Fed officials have indicated this month that they're increasingly concerned with rising price pressures, spurring traders to bet they will lift their benchmark rate as soon as August.

Economists have been less aggressive, with the median projection in a monthly Bloomberg News survey indicating most analysts anticipate the Fed will wait until next year. JPMorgan Chase & Co. and Barclays Capital Inc. economists now forecast an increase in September.

``You want to keep wages behaving,'' Poole said today. Once public expectations of accelerating inflation start stoking demands for higher wages, ``the jig is up'' and consumer prices become harder to contain, he said.

Expected Rate

American consumers anticipate an annual inflation rate of 3.4 percent in the coming five years, matching the highest level since 1995, a Reuters/University of Michigan survey showed last week.

The Federal Open Market Committee next meets June 24-25, when investors expect it will keep the benchmark rate at 2 percent, after seven reductions since September. Futures contracts indicate a 55 percent chance of at least a quarter- point boost at the August meeting.

The Fed should act if reports show faster inflation, combined with ``less downbeat'' indications for economic growth, Poole said today. ``We do not yet see a real `in your face' bad inflation report.''

Poole, who turns 71 this week, led the St. Louis Fed bank for 10 years. He was previously chairman of the economics department at Brown University in Providence, Rhode Island.

``There's a lot of pain yet to come in the real estate sector,'' with house prices falling as much as 20 percent from current levels, Poole said. The Fed shouldn't be held ``hostage'' by a troubled industry that prevents it from raising interest rates, he said.

Prices Doubled

Oil prices have almost doubled in the past year, and reached a record of $139.89 a barrel yesterday. That's helped cause a 34 percent leap in gasoline, which this month surpassed $4 a gallon (3.79 liters) for the first time.

Former Fed Chairman Paul Volcker said last month that the current inflation situation is similar to the early 1970s, when price gains started picking up. The Fed at the time failed to contain the situation, allowing inflation to exceed 10 percent later in the decade.

``There is some resemblance to where we are now in the inflation picture to the early 1970s,'' Volcker said at a Joint Economic Committee hearing at Congress May 14.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: June 17, 2008 14:40 EDT