WASHINGTON (AFX) -- The economy may be approaching its speed limit, and inflation pressures could emerge if the Fed isn't vigilant, Chicago Federal Reserve President Michael Moscow said Tuesday.
'With the unemployment rate currently at 4.7% and capacity utilization near its long-run average, it is important to ask how much slack remains in the economy,' Moskow said in prepared remarks to the University of Chicago Graduate School of Business.
'Given that the economy is operating close to potential, we need to be careful to monitor for the emergence of any economy-wide strains on resource utilization. Such strains would have the potential to increase inflation pressures,' Moskow said.
Moskow does not hold a vote in 2006 on the interest-rate setting panel that rotates among the regional Fed presidents.
Moskow's remarks are almost identical to a speech he gave in February. He repeated a warning that overnight interest rates may need to be tweaked some more to keep inflation expectations from rising.
The federal funds contracts have priced in overwhelming odds for another interest-rate hike at the Fed in March. It would be the 15th straight meeting with a quarter-point hike, and would bring rates up to 4.75% from the decades-low level of 1.0% in June 2004.
Moskow said there was still a great deal of uncertainty over estimates of slack in the economy.
But he said 'an unemployment rate of 4.7% likely indicates a vibrant labor market in which more firms may begin to bid up wages to attract and retain workers.'
'Long periods of high resource utilization are often associated with rising costs and prices,' Moskow said.
As recently as 2000, the unemployment rate fell to 4.0%.
'Businesses offered attractive wages to many workers, and these costs were passed along in the form of higher core consumer price inflation,' he said.
'We are not at that point yet,' he said.
He noted that wage gains have been relatively moderate and strong productivity has held back labor costs.
Moskow said a key factor for Fed officials is inflation expectations.
'If these expectations were to rise persistently, then policy clearly would have to be tightened further,' Moskow said.
'Of course, other events could transpire that result in prospects for inflation expectations that would be consistent with a less-firm policy stance,' he added. This story was supplied by MarketWatch. For further information see www.marketwatch.com.