The Federal Reserve's commitment to fight inflation may be keeping soaring oil prices from triggering a broader increase in consumer prices, Fed Governor Edward M. Gramlich said in an interview.

"It is a wondrous event for those of us who were here in the '70s," when oil prices caused inflation to surge, Gramlich said on Tuesdayfrom his office in Washington. The Fed's efforts may have "worked in keeping inflation at bay when oil or gas prices have gone up so much." Gramlich, 66, is leaving the Fed on August 31 after almost eight years to return to teaching at the University of Michigan.

Surging fuel costs pushed the prices paid by US consumers in July to the highest level in three months, the Labour Department said on Tuesday. Excluding energy and food, prices rose a smaller-than-expected 0.1 per cent for a third straight month, evidence that rising oil costs haven't sparked broader inflation.

Gramlich said he overestimated the potential for soaring oil prices to stoke inflation.

"I was a little too pessimistic," he said on Tuesday. Since the Fed began lifting interest rates in June 2004 in quarter-point moves, "inflation has stayed low and on target, the economy has recovered and unemployment has fallen." He said "it's hard to quarrel with the outcome."

During a September 2004 speech, Gramlich said oil shocks inevitably lead to some combination of rising inflation and unemployment. The worst possible outcome for central bankers, he said at the time, would be to let "inflation come loose from its moorings."

Lower labour costs overseas should help the US to continue growing without accelerating inflation, Gramlich said Thursday.

Oil shock

Producer prices rose in July by the most in nine months and so-called core prices increased more than expected, the Labour Department said on Wednesday. The wholesale figures, which contrasted with Thursday's consumer inflation report, may have been skewed by volatile pricing at automakers including General Motors Corp, economists said.

The price of oil on the New York Mercantile Exchange reached a record US$67.10 a barrel on August 12, 47 per cent higher than a year earlier. As the price of oil climbed, so-called core inflation changed little over 12 months, edging up from 1.8 per cent a year ago to 2.1 per cent last month. Inflation averaged 11 per cent during the 1974 oil shock and 12 per cent during the shock of 1979-80.

Bush's fed

The former dean and college professor, known as "Ned," will be the second Fed governor to leave this year, clearing the way for George W. Bush to become the first president since Ronald Reagan to have either appointed or reappointed all seven central bank board members. Ben Bernanke left the Fed in June to become chairman of the White House Council of Economic Advisers.

Chosen by former President Bill Clinton in 1997, Gramlich is the only current Fed governor to dissent on an interest rate move. As a central banker, he made community development his main focus and headed the board that made US$10 billion in federal loan guarantees available to airlines after the September 11, 2001, attacks in New York and Washington.

"Ned says he is leaving the board to return to teaching, but I must point out that, in a sense, he never left teaching," Fed Chairman Alan Greenspan said in a statement to Bloomberg News. "He has been instructing us all along, and we at the board have been his willing students."

Broad consensus

Gramlich is resigning with more than two years left in his Fed term. He skipped the Federal Open Market Committee's August 9 rate-setting meeting, honouring a Fed tradition that departing governors not attend their last gathering, and declined to comment Thursday on the future path of interest rates.

"On the fundamentals of monetary policy, there is quite a broad consensus on the Open Market Committee," Gramlich said. "It's important to keep inflation low, to keep prices stable. If you do that, you probably have more freedom, not less freedom, to fight unemployment."

In September 2002, Gramlich and former Dallas Fed bank president Robert McTeer dissented from an FOMC decision to leave interest rates unchanged at 1.75 per cent. They wanted to cut rates to keep the economic expansion from losing momentum.

Gramlich "saw beyond where the committee was," said Al Broaddus, former president of the Federal Reserve Bank of Richmond, Virginia. "In retrospect, that was a perceptive position to take."

The committee cut the overnight bank lending rate by half a percentage point, to 1.25 per cent, at its next meeting in November 2002.

'Social conscience'

The son of an Eastman Kodak Co. engineer who would volunteer to raise money from churches, Gramlich spoke against predatory lending practices by banks, supported more affordable housing and pushed for new ways to combat lending abuses in the mortgage market for high-risk borrowers.

"He felt very strongly that society should have a social conscience," said Robert Parry, the former president of the Federal Reserve Bank of San Francisco, who's known Gramlich for 40 years.

During his time at the Fed, Gramlich, a Democrat, was a critic of rising federal deficits, saying they hurt long-term economic growth and weakened national savings. Deficits have "already triggered some combination of lower investment and higher borrowing" and are a "long-run problem" for the economy, he said Thursday.

A grandfather of four, Gramlich is a St. Louis Cardinals baseball fan and former batboy for one of its farm teams. He began his career at the Fed as a researcher in 1965, taught economics and public policy at the University of Michigan from 1976 to 1997, and was dean of the college's public policy school. Before Clinton appointed him to the Fed, Gramlich served in top slots at the Congressional Budget Office in 1986 and 1987.

"I am pretty proud of monetary policy," he said. "It's possible that even if there are new people at the table, you wouldn't see much change in policy."

Source: China Daily