Fed should balance jobs, prices: lawmaker

By Mark Felsenthal

WASHINGTON (Reuters) - Democrats now controlling the Congress will ask the Federal Reserve to explain how raising benchmark interest rates affects jobs and wages, a key lawmaker said on Thursday.

"There's this big question of should the Fed tighten or not. Well, they shouldn't be (doing so) solely because of inflation. We need to look at what's the impact on unemployment and on wages," Rep. Barney Frank said, speaking at the Reuters Regulation Summit in Washington.

Frank, a Massachusetts Democrat, became chairman of the House Financial Services Committee after Democrats won control of both houses of Congress in November. The panel holds hearings twice a year on the Fed's outlook for economic growth and price stability and to quiz the Fed's chairman about economic and fiscal policy.

Frank's emphasis on the effects of rate hikes on jobs could expose the Fed to pressure not to raise rates when the central bankers are worried about inflation.

Fed officials have said that tight U.S. labor markets, with unemployment slightly above a 5-1/2 year low, pose possible inflation risks as employers raise wages to attract and retain workers. Policy makers hope somewhat sluggish economic growth will create slack in job markets and allow inflation to recede.

Most economists expect the U.S. central bank to hold interest rates steady through the first half of 2007 but then lower interest rates as inflation abates to help the economy rebound from a slowdown in housing markets and manufacturing.

Frank said he is encouraged that Fed Chairman Ben Bernanke has said wages can rise in step with gains in productivity and not cause inflation, and that higher pay is only a problem if businesses pass those costs along to consumers.

"Ben's been good on this... wages are what 80 percent of the people live on, and it is not good when they go down and it is not necessarily bad when they go up," Frank said.

Frank said he expects his chairmanship to bring committee discussion about the Fed's role, its policy decisions, and whether the Fed should set explicit inflation targets.

Fed Chairman Ben Bernanke is a long-time advocate of inflation targeting. The Federal Reserve has scheduled additional meeting time to discuss how it communicates with the public and the markets. Fed officials have said the internal meetings include debate on inflation targeting.

Frank suggested that he sees his role in part as demystifying the Fed and its deliberations.

"We debate a whole lot of very important issues, but the view that if we were to debate if a 25-basis point increase in the interest rate is justified, that that would somehow send tremors through the world, it's just not true," he said. "These are public policy questions like any other."