Richmond FED president says Rate policy likely in flux.

Short-term U.S. interest rates probably won't reach a plateau and then remain steady as financial markets now predict, the president of the Richmond Federal Reserve Bank said Thursday. Standing before the National Economists Club in Washington, Jeffrey Lacker said that interest rates will likely fluctuate during the economic expansion ahead. It was his second speech in as many days.

"Thus, whenever the current sequence of tightening moves reaches completion, short-term interest rates should not be expected to remain constant for an extended period of time," Lacker said. Lacker did say that rates have been "rising toward a range"consistent with steady growth.

Lacker also said it was "too soon to say" whether rates are already in that range.

Lacker did say that sustained growth path decisions will be more complex than the Fed simply reaching a coasting point in coming months.

Energy prices still pose a risk to core inflation, but the Fed's "well-positioned" to resist inflation pressures should they emerge, Lacker said.

"In the immediate aftermath of Hurricanes Katrina and Rita, monetary policymakers naturally have focused on the risk that the attendant energy price increases would 'pass through' to an acceleration in core inflation," Lacker said Inflation-adjusted, or core, inflation has been tame for the last several months, Lacker said.

While there wasn't an upsurge in core inflation in September and October and November, he noted that "it is too soon to declare that pass-through risk is entirely behind us." "We've gotten a few good core numbers in the last three months," Lacker said, adding that this has "moderated" his concerns.

"But I don't think that risk is entirely behind us yet," he said.

In his remarks, Lacker gave a mostly positive reading on the nation's economy, calling the outlook "fairly encouraging." "Growth is on a solid footing, despite this year's run-up in energy prices and the disruptions of a devastating hurricane season," he said. He predicted real gross domestic product will grow at about 3.5% in 2006. Household spending should grow at about the same rate in real terms, he said. Lacker's set to become a voting member of the rate-setting FOMC next year. Like other economists, Lacker expects appreciation in housing prices to flatten in 2006. Aggregate residential investment, he added, will likely stop growing or may even decline.

Consumer spending, meanwhile, is likely to be buoyed by what Lacker called "healthy income growth" and a "reasonably strong overall job market." Rita and Katrina had less impact on the overall economy than was initially feared, Lacker said. "The effect of the storms on consumer outlays have turned out to be far more limited than expected, exemplifying the oft-cited resilience of the U.S. economy," he said. But he said monetary policymakers should address energy shocks by focusing on price stability. "Any energy price pass-through to core inflation that is more than marginal and transitory would be unwelcome," he said. So far, he noted, market participants believe core inflation will remain contained. Lacker told the economists in Washington that the yield curve was not a good predictor of future economic trends.

Lacker also said he wasn't troubled by the low U.S. personal savings rate, saying he did not put much weight in the statistic.

"I think consumption is on a sustainable path," he said.

In addition, he said he wasn't worried about a sharp break hitting financial markets as a result of the large U.S. current account deficit.

Let's see:

• Personal savings rate is not a problem
• Consumption is on a sustainable path
• He is not worried about the large U.S. current account deficit
• Interest rates have been rising towards a range consistent with steady growth
• The yield curve is not a good predictor of future economic trends

One more thing he forgot to say: Don't Worry Be Happy.