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Friday February 18 6:40 PM ET
Fed Says It's Raising Rates GraduallyBONITA SPRINGS, Fla. (Reuters) - Federal Reserve Board Governor Edward Kelley said on Friday the U.S. central bank was raising interest rates step by step as this was a safer way of slowing the surging economy in uncertain times. Speaking to the Bonita Springs Speakers Assembly, the central banker said the U.S. economy was growing at a pace that could spark inflation unless it slowed down soon, but the Fed feared big rate rises may be a mistake rather than the answer. ``We see ourselves in an era where change is radical and it's very very difficult to be very very sure what you are doing is the correct thing to do at any given time. So it seems to us that the best way to go is incrementally,'' he said in reply to a question about why the bank changed rates in quarter-percentage point moves. Since last June, the Fed has raised rates four times, by a quarter percentage point each time, to put its target for the fed funds rate on overnight loans at 5.75 percent. Its less-used discount rate stands at 5.25, leaving official U.S. rates at their highest level in five years. Kelley, whose views usually closely reflect those of the Fed board and chairman Alan Greenspan, was speaking a day after the Fed chief suggested that the economy needed more than just a modest rise in interest rates to prevent overheating. In sounding this warning, Greenspan too had said that the central bank favored a gradualist approach to monetary policy for the world's largest economy. Kelley explained the central bank's approach by saying that step-by-step moves in rates always allowed the bank to change course more easily if its judgement proved wrong. ``We never want to bet the ranch on any one theory. We could very well be proven wrong over time in any different direction and there's always got to be a way back,'' Kelley said. ''There's always got to be a way to change if you turn out to be wrong without having done an enormous amount of harm in the process.'' Echoing Greenspan's concern about the pace of growth, Kelley said the economy probably faced the threat of a resurgence of inflationary pressures and that there was no end in sight to the current expansion which became the longest in history this month at 107 months. Kelley said he and others at the powerful central bank were unsure what the rate of sustainable growth -- the pace at which the economy can expand long-term without generating inflation -- was right now. But he cited the ever-tightening labor market -- with the unemployment rate of 4.0 percent marking a 30-year low in January -- as the main cause for concern for the central bank. ``Along with my colleagues at the Fed, we are watching this very very closely and trying very hard to understand what is going to be a sustainable growth rate. Probably the best evidence that we are beyond it is the fact that the unemployment rate keeps inching down.'' Another worry was the recent jump in oil prices, caused by cuts in production, which have pushed the cost to a nine-year high, where it last was during the 1991 Gulf War. Some Fed officials have expressed their concern that a sustained rise in oil prices could feed into other prices, prompting a general rise in prices. ``The good news is our economy is not as dependent on oil as it used to be,'' Kelley said. ``Nevertheless it is an important commodity and an important economic input. We watch it and when it's price goes up that is an obvious concern because that tends to raise costs, which is where rising prices come from,'' he said. Earlier Stories
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