Wednesday October 11 12:03 AM ET

Officials Warn Oil Could Be Spoiler

By Barbara Hagenbaugh

WASHINGTON (Reuters) - Two U.S. Federal Reserve officials on Tuesday said they were optimistic about the current path of the U.S. economy but said higher energy costs could become a bump in the road if they climb further.

Federal Reserve Bank of Kansas City President Thomas Hoenig and his counterpart in Dallas, Robert McTeer, both said the U.S. economy is strong even though growth appears to be slowing.

``The data coming in are mixed but, overall, I would say signs are that the economy is moderating.'' Hoenig, speaking at a forum sponsored by the Kansas City Fed in Albuquerque, New Mexico, said.

``It is moderating and I think that helps,'' he said, noting that the U.S. Gross Domestic Product had previously been racing ahead at levels that had the potential to be inflationary. McTeer, noted for his enthusiasm for the benefits of technological advances, also delivered an upbeat message.

``I might say, that my optimism continues to be rewarded,'' McTeer told the World Affairs Council and Texas International Trade Alliance in Houston.

The Federal Reserve raised interest rates six times from June 1999 until May in an effort to slow the U.S. economy to a less inflationary level. Neither Hoenig nor McTeer is a voting member this year on the Fed's rate-setting committee, which rotates votes among the regional presidents.

Last week, the committee left rates unchanged but warned that energy prices and tight labor markets could pose an inflation risk.

Both Hoenig and McTeer said policymakers must keep a close eye on skyrocketing oil prices out of fear they may tip the economy into an inflationary spiral.

``We've seen energy prices accelerate up and while energy is a less significant part of our economy today than it was in the 70s -- when we had the oil crisis -- it is still important and shouldn't be taken for granted,'' Hoenig said.

If prices moderate, then ``our economy will move on,'' he said. ``But if it continues to accelerate up, then we have to be aware of that and of course it will influence the economy.''

McTeer said the higher energy costs made him ``less optimistic'' about the U.S. economy. Pressed by reporters, he said: ``I don't really expect inflation to pick up that much because of oil. It's just that if I have to make a list of my concerns that is sort of near the top.''

Oil prices have stayed stubbornly high, although they are now trading below the post-gulf war high of $37.80 a barrel hit on September 20. On Tuesday, the price of crude oil trading in New York climbed more than 4 percent to $33 a barrel.

Many Fed officials have argued that because the U.S. economy has become so much more diverse over the last decades, it is less vulnerable now to oil shocks.

Hoenig said he expected U.S. economic growth will be in the range of 3.5 percent and 4.5 percent in the year ahead. GDP rose at a revised 5.6 percent annual rate in the second quarter of this year after climbing 4.8 percent in the first quarter.

http://dailynews.yahoo.com/h/nm/20001011/bs/economy_fed_dc_1.html

-- Carl Jenkins (Somewherepress@aol.com), October 11, 2000