San Francisco, May 9 (Bloomberg) -- Inflation is poised to accelerate and Federal Reserve policy-makers need to act to keep inflation expectations in check, two central bankers said today.
As a result, investors may be correct to expect the Fed to raise the overnight bank lending rate by a half percentage point when they meet next week, said Robert Parry, president of the Fed Bank of San Francisco. ``The futures markets would suggest that we're going to move more aggressively,'' Parry said. And while the Fed has raised the overnight rate five times since June -- each time in quarter-point steps -- a half-point increase may still be consistent with the gradual approach so far, he said in a San Francisco speech. ``I think we've moved cautiously, but that doesn't mean we only have a single note to play,'' Parry said. ``I'm not sure I would consider a second note as being inconsistent with caution.''
Moreover, the Fed must maintain a public stand against accelerating price increases ``so that inflation expectations are also relatively low,'' said Fed Vice Chairman Roger Ferguson, in a separate San Francisco speech. The priority of the Fed is to maintain ``an obvious stance of vigilance,'' he said.
The comments of Ferguson and Parry -- both of whom will vote at the May 16 meeting of the Fed's policy-setting Open Market Committee -- suggest the central bank will decide to do what investors have already concluded it will.
Trading in June fed funds futures contracts suggests most investors expect the FOMC to raise the overnight rate a half point to 6.5 percent in June from the current 6 percent. ``The market's priced this thing in, and the Fed would be foolish to turn its back on it,'' said Tim Rogers, an economist at Briefing.com.
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