Fisher: Fed Tiller Can Steer Either Way
Federal Reserve Bank of Dallas President Richard Fisher on Monday said the U.S. central bank cut interest rates last week to avert an unacceptable economic slowdown and said it could move again, in either direction.
"FOMC (Federal Open Market Committee) members will continue taking in-depth soundings on the progress of the economy and the financial markets as we evaluate the impact of the 50 basis point course correction," Fisher told the North Dallas Chamber of Commerce in a speech that was mainly about education.
"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," he said. Fisher is not a voting member of the FOMC, the Fed's interest-rate setting committee, this year.
The Fed cut its key federal funds interest rate by a larger-than-expected half percentage point on Sept. 18 to 4.75 percent and said it would monitor the economy and act as needed to foster price stability and sustainable growth.
"There was room to cut, the question was by much. We decided by 50 basis points...that was to provide a little more oomph to economic growth," he said in response to a question.
The move was bolder than forecast, but Fisher said that it was not the U.S. central bank's mission to match expectations. "I don't know if it surprised the markets or not...on the other hand, our job is not to satisfy the markets," he told reporters after the speech.
Some fear that the U.S. will be dragged into a recession by the slumping housing market, but Fisher was more upbeat about U.S. economic prospects after the cut.
"I expect economic growth to remain positive," Fisher said. "I expect growth to be stronger than it would have been before we made our decision."
Fisher stressed inflation was a "virus", but the Fed had room for maneuver on policy thanks to favorable data.
"Recent trends in inflationary impulses and expectations... appeared to me to provide some wiggle room to adjust our tiller and steer a more growth-orientated course," he said.
He also acknowledged cutting rates when financial markets were demanding action risked moral hazard -- the danger central bankers make matters worse by bailing out reckless investors and encouraging them to speculate even more.
"Over-correcting our course with too aggressive a shift in the fed funds tiller would have, I believe, undermined the discipline that market forces impose upon wayward financial institutions and investors. Moral hazard is a dangerous predicament for any central banker," he said.
"Yet we had an unsettled money market riddled with angst -- a money market that, in my view, was going into a defensive crouch in which even the best...operators feared that the positions taken by their less prudent brethren may come a cropper and seize up the entire system," he said.