Dallas Fed president foresees 'anemic' growth into 2009

On the inflation outlook, we've had some very thorough retracements of prices on commodities. I think we have to be careful not to get too excited about that.

For one, they might not last. After having had their margins gutted, you can understand how companies would be a bit skeptical about the recent retracements and their instinct to want every opportunity to buy protection from being victimized again. Under that scenario, consumer prices could, at a minimum, be very sticky on the downside.

The jury is out as to whether the lesser momentum in the economy will be sufficient to translate into (lower prices). It definitely has not so far.

Q: If companies maintain their prices, even at a high level, isn't inflation no longer an issue?

A: What I worry about is, if and when we pick up the pace again, what will be the base rate of inflation, and what will we pick up from there?

The question is not just immediate price pressures, but how much relief from these very bad numbers we've had in June and July are we likely to get? What level will we sink back to? If we were, for example, to start growing again and the sort of inflationary floor is 4%, then we have a problem on our hands.

Q: Why is it not a given that a slowdown in the economy will ease inflation?

A: First, it's a question of how much it slows, and secondly, there are other price pressures elsewhere. China is a good example. What I'm hearing (from businesses) is that they are not yet seeing (price) relief on the downside.

Q: If a lot of our inflationary problems are imported, how would higher U.S. interest rates help?

A: The one thing that we have to deal with is the perception of what we do. We cannot be ever perceived as accommodating inflation. If we are perceived as being accommodating, then that just gives Main Street a little more of a nudge towards acting in a way that inculcates inflation. Remember that a lot of this is psychology, and it doesn't fit into a neat, formulaic model. This is all a matter of judgment.