The Federal Reserve should leave interest rates on hold for now to achieve sustainable economic growth while getting inflation under control, a top central bank official said on Friday.
Fed Board Governor Frederic Mishkin said that maintaining a strong anti-inflation stance was also key to reining in inflation expectations.
While he said he favored the current stance of monetary policy given prevailing economic conditions, Mishkin said the Fed must stand ready to fend off either perceptibly slower growth or persistently high inflation.
"We will do what it takes," Mishkin told an audience of students and academics at Bard College's Levy Economics Institute. "I continue to believe that the current stance of monetary policy is likely to foster sustainable economic expansion and a gradual ebbing in core inflation."
Still, he noted that uncertainties had increased on both the growth and inflation fronts, adding that such shifts warranted constant monitoring by policy officials.
Indeed, the incoming flow of economic data has been filled with mixed signals.
A slump in housing has been a drag on growth and business investment has also started to flag. But labor markets have remained relatively robust, stoking fears that a broader rise in wages might stoke inflation.
Mishkin had stirred financial markets recently with comments suggesting he was willing to tolerate a slightly higher rate of underlying inflation than analysts generally assume the Fed is comfortable with.
Mishkin said core inflation -- stripped of volatile food and energy costs -- has risen largely on higher housing costs but should slow to around a 2% annual rate over the next couple of years, adding: "Although I expect that core inflation will drift down, I recognize that achieving further reductions may take time."
Official overnight interest rates have been on hold since June of last year. For the preceding two years, the Fed had pushed its benchmark federal funds rate steadily higher from a four-decade low of 1% to the current 5.25%.
Rates set by the Federal Reserve affect everything from student and car loans to mortgages.