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Fed's Fisher defends rate cut
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DALLAS
An improved inflationary environment and rising threats to economic growth
motivated last week's Federal Reserve rate cut, and policymakers are
prepared to act again if needed, Federal Reserve Bank of Dallas President
Richard Fisher said Monday.
"We have an otherwise healthy economy weakened to an unknown degree by a
correction to excessive speculation in its housing sector and related
financial instruments," Fisher said. Meanwhile, "on the price front, the
economy has been experiencing mitigation in inflationary tendencies,"
Fisher said.
So, with overall output threatened and inflation pulling back, the Fed had
room to act to protect the economy, he said.
"If we had maintained the anti-inflationary course we had been following
for more than 14 months by holding the fed funds rate at 5.25 percent, I
believe we would have risked oversteering our course and potentially run
afoul of the shoals of unacceptably slow economic growth," Fisher said.
Fisher, who isn't currently a voting member of the interest rate setting
Federal Open Market Committee, spoke after the central bank cut interest
rates last week by a wider-than-expected margin. The FOMC said its
half-point cut to 4.75 percent was aimed at preventing the recent
turbulence of financial markets from dragging down overall economic
activity.
Fisher's comments came from a speech prepared for delivery before a
gathering of the North Dallas Chamber of Commerce, in Dallas. He also
spoke to reporters after the speech.
Fisher explained in his speech that while a more benign inflationary
environment gave the Fed the "wiggle room" it needed to ease rates, he
realizes the risks posed by the cut. He said the danger is that the Fed's
rate cut will be perceived as bailing out investors, which increases the
risk they'll take unwarranted risks in the future.
"Moral hazard is a dangerous predicament for any central bank," Fisher
said. But "we had an unsettled money market riddled with angst," and that
needed to be addressed given the broader economic implications of that
situation.
The Fed president explained that policymakers will monitor the progress of
the economy and the financial markets, as they evaluate the impact of the
rate cut.
He added, employing a nautical metaphor, "should further correction --
either to port or to starboard -- be needed to stay on the course toward
sustainable, noninflationary growth over time, we will make it."
Still, the central banker remained optimistic about what lies ahead for
the economy. "I expect growth to be stronger than it would have been
before we made our decision," Fisher said. "I expect (growth) to remain
positive."
Fisher also doesn't believe that the size of the Fed rate cut will spark
inflation. "I think monetary policy has been effective in its impact on
inflation, and I expect that to continue," he said.
The bank president downplayed the influence of former Fed chairman Alan
Greenspan, who has since the release of his memoir last week been a near
constant media presence. Greenspan has been weighing in on a wide range of
economic matters, and some feel his comments have obscured what current
Fed policymakers are saying.
Greenspan is "the former chairman of the Federal Reserve, and if the
market chooses to listen the former chairman of the Federal Reserve, they
have every right to do so," Fisher said. Even so, "I think we are getting
our message out," he said. |
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