Boston Fed Chief: Interest Rates Are No Solution To High Gas Prices

If you feel like your income is staying the same but your cost of living is going up, Angelo Paoletty is right there with you.

"The price of fuel keeps going up," the trucker said as he filled up his tractor-trailer at more than $4 per gallon. "Just wish we would, uh, I don’t know, somebody should figure this out."

"Well, that somebody is not me!" is essentially what the head of the Federal Reserve Bank of Boston said Wednesday morning.

"If you want to target oil prices," Boston Fed President Eric Rosengren told a a real estate trade group, "you wouldn’t pick monetary policy to do it."

Rosengren says the Fed’s power to raise or lower interest rates is a poor tool to control high gas prices. Even so, he said he is worried about the price at the pump.

"It does serve as a tax," Rosengren said. "You don’t drive a whole lot less when oil prices go up. You still need to go to work, you still need to drop your kids off to school or to daycare or do whatever else. Demand for oil doesn’t change that much even when the price of oil changes quite dramatically."

The quite dramatic recent change in the price of oil makes some other members of the Federal Reserve want to get ready to act. They argue the price of many other goods and services may well follow suit. That's precisely the overall inflation that the Fed is supposed to keep in check. But Rosengren says curbing inflation by raising interest rates would be a mistake.

"When we raise interest rates, we slow down the economy," Rosengren warned. "It would be slowing down consumption for households. It would slow down investment for businesses. The initial effect would be that in many respects it would make things worse."

In the end, Rosengren is less worried about high gas prices than he is about the high unemployment rate.

-- Here are Rosengren's remarks (on Scribd):

http://www.scribd.com/doc/54645120/Boston-Fed-Chief-Eric-Rosengren-Speech-5-4-11