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Economist: US Should Raise Interest Rates to Head-Off Inflation - 2004-08-26

Oil prices have doubled in the past two years with nearly 50 percent of that rise coming in the past eight months. VOA's Barry Wood talks to a monetary economist who argues that the inflationary impact of rising oil prices should prompt the U.S. central bank to be more aggressive in raising interest rates.

Brandeis University professor Stephen Cecchetti worries about the inflationary impact of higher energy prices.

"The primary problem as I see it is inflation, going forward," he says. "And the reason that the Federal Reserve should not wait [to raise rates further] is that they have to assure that inflation doesn't rise dramatically over the next few years."

Mr. Cecchetti argues that even though U.S. inflation is below three percent it's a full percentage point higher than a year ago. He is also concerned that the Federal Reserve not repeat the mistaken policies of the 1970s when it responded to higher priced oil by holding interest rates steady.

"Oil price increases are things that both create inflation and slow the economy slightly. The inflation they create is a matter of serious concern," he explains. "And if we look back to the 1970s we see that one of the reasons for the high inflation we had was that the Federal Reserve at the time failed to raise interest rates sufficiently aggressively in the face of higher oil prices."

The Federal Reserve says with the economy growing at a nearly four percent rate it is now able (at a measured pace) to bring interest rates back to the normal levels that prevailed in 2001 before it aggressively cut rates to pull the economy out of recession.

Other economists disagree with Mr. Cecchetti. They say that there are unmistakable signs that the economy is already weakening because of higher oil prices. That weakness, they say, should prompt the central bank to hold interest rates steady at its next policy making meeting September 21.