Fed's Poole Says Low Inflation Eased Blow From Housing Weakness

Federal Reserve Bank of St. Louis President William Poole said on Monday that low inflation must be a central bank's prime goal, adding this had helped cushion the U.S. economy from its cooling housing market.

"We have seen little fallout from the ending of the housing boom," he told a business audience at an event staged in Santiago, Chile, by the Global Interdependence Center of the University of Pennsylvania.

"At least thus far, only the residential construction industry and closely allied industries and professions have experienced any significant effects of the slowing of housing markets.

"Needless to say, I doubt that our financial system or economy would show such resilience if inflation were not low and stable," said Poole, who is a voting member of the U.S. central bank's interest rate-setting committee this year.

A sharp downturn in the once-hot U.S. housing sector dragged economic growth back to a 2.2% annualized pace in the fourth quarter, but consumer spending remains strong and the Fed expects output to gradually pick up this year.

Poole repeated his long-standing support for a specific inflation target, a topic being examined by the Fed under the leadership of Chairman Ben Bernanke as part of a wider study of communication strategy.

Some members of the Democrat-controlled Congress worry that an inflation target could be pursued at the expense of employment and growth, which is the other part of the U.S. central bank's legal dual mandate.

But Poole said that anchoring inflation expectations made it much easier for policymakers to cut interest rates and cushion the economy from a shock like the September 11, 2001, attacks on U.S. cities.

"The Fed's ability to respond quickly and decisively to the extraordinary demands for liquidity during these events was enhanced by the fact that inflation was low and expected by the public to remain low," he said.

Poole also spelled out his preference for the level of inflation for which the Fed should take aim.

"My way of stating my comfort zone is core inflation of 1.5% per year, plus or minus a range of 0.5% to allow for unavoidable short-run fluctuations.

"My statement is meant to indicate that I would like monetary policy to aim at 1.5% core inflation and not just accept inflation barely inside one end or the other of a 1% to 2% range," Poole said.

The core consumer price index, which excludes food and energy, rose at a 2.7% pace in January versus the same month last year. This was a slight uptick from the 2.6% year-on-year pace recorded in December.