Fed's Fisher: Economy Weathering Housing Troubles

Dallas Federal Reserve Bank President Richard Fisher on Monday said the U.S. economy appears to be weathering troubles in housing and financial markets, but it was uncertain how things will play out.

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"Our economy appears to be weathering the storm thus far. The future path of that storm and the appropriate policy course, however, are still to be determined," Fisher said in remarks prepared for delivery to a community forum in Laredo, Texas.

A text of his remarks was provided to reporters in advance of delivery.

His comments come after a report on Friday showed the U.S. economy shed jobs outside of the farming sector during August, the first decline in four years.

Fisher, who is not a voting member this year on the Fed's interest rate-setting panel, said new regulations would be more likely to resolve troubles stemming from the subprime mortgage lending boom than policy moves by the central bank, adding that it was not the Fed's job to protect risk-takers.

"I do not believe the Federal Reserve's job is to protect specific risk takers who failed to protect themselves from potential downside wounds," he said. "The Federal Reserve's job is to protect the system itself."

Yellen Sees Dangers of Credit Crunch

Earlier Monday, San Francisco Federal Reserve Bank President Janet Yellen that current financial market turmoil has added "appreciably" to downside risks for the U.S. economy.

AP Janet Yellen

Still, Yellen said that the goals of price stability and full employment must be the "unswerving focus" of  policy-makers.

"Monetary policy should not be used to shield investors
from losses,'' Yellen said in a speech to the National Association of Business Economics annual meeting.

Yellen is not a voting member of the central bank's Federal Open Market Committee in 2007.

She said that declining home prices could hurt consumer spending, and that risks to economic growth would be ''significant'' if housing prices fall in the context of rising unemployment.

The Fed's actions to shore up the credit markets so far have been "helpful'' but not a panacea, Yellen said.

Ultimately, the bank must consider the role of policy lags in making any adjustment, she said. "It is critical to take a forward-looking approach.''

Lockhart Steps Back

Earlier, Atlanta Federal Reserve Bank Dennis Lockhart stepped back from his assertion last week that housing woes had so far not clearly affected the broader economy, but said weak jobs data should be evaluated in tandem with strong retail sales.

"Friday's data ... show employment was beginning to soften back in June. This news should be evaluated with recently positive reports in retail sales," Lockhart told a business group.

On Thursday, Lockhart had said he had not seen data providing conclusive signs that housing problems were spilling over into the broader economy.

Lockhart amended his remarks on Monday to say he is now processing new information and other timely data as he prepares for the U.S. central bank's Sept. 18 rate-setting meeting.

Lockhart's speech otherwise closely paralleled remarks he made Sept. 6.

Mishkin Also Speaking

Fed Governor Frederic Mishkin is also speaking Monday. His comments will undoubtedly be closely parsed by Wall Street for clues about the economy's health and the central bank's upcoming decision.

The government reported on Friday that U.S. nonfarm payrolls shrank by 4,000 jobs in August, the first fall in four years, raising expectations the Fed would need to cut its benchmark federal funds rate.

However, in a sign consumer spending remained resilient despite the housing market downturn and financial market turbulence, major retailers turned in better-than-expected August sales.

So a rate cut, though widely anticipated, is not guaranteed. Bad economic news could cause more jitters for Wall Street this week, but also, any indication that the Fed might keep rates steady will most certainly trigger heavy selling.

The Fed has said for months that with the economy growing moderately, inflation is its primary concern. Since stocks tumbled in late July, the Fed has lowered the discount rate it charges banks, injected about $320 billion into the banking system through repurchase agreements, and said it is prepared to act as needed to keep the stock market's plunge from damaging the economy. But it has stopped short of announcing a reduction in the benchmark federal funds rate.

Economic Data This Week

Investors will be poring over the economic data all week. Tuesday's reading on the U.S. trade deficit will be a particularly closely watched report. But like last week, Friday is the big data day and should help investors gauge how American consumers and businesses are faring and how the Fed might act when it meets next week.

Despite all the negative feelings out there, economists anticipate Friday's data to show that the average U.S. consumer isn't caving under the weight of the slumping housing market. August retail sales are expected to have ticked up 0.2 percent, following July's 0.3 percent increase, and the University of Michigan's preliminary September consumer sentiment reading is forecast to show little change from August.

Analysts also predict that Friday's data will show that businesses kept chugging along late this summer, albeit modestly. Industrial production is predicted to have increased 0.2 percent in August, following a 0.3 percent gain in July, and August capacity utilization is anticipated to register at 82 percent, about the same as in July. Business inventories are expected to have risen 0.3 percent in July after rising 0.4 percent in June.

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