The Federal Reserve will not allow inflation to get out of control and is aware of the danger that a weaker dollar could feed into higher prices, one of its top policy-makers said.
"We want to make sure the message is clear ... that we will not countenance building inflationary expectations," said Federal Reserve Bank of Dallas President Richard Fisher.
"We are witnessing a negative feedback loop ... which is that a weaker dollar can lead to further inflationary pressures which in turn leads to a weaker dollar, et cetera, and to dampened economic activity," he said in response to questions after a speech at the Council on Foreign Relations.
Fisher, a voting member of the Fed's interest rate-setting committee this year, has dissented at the last three policy gatherings in favor of either smaller rate cuts than were agreed, or because he wanted no cut at all.
He said he had drawn the line at 3.5 percent, whereas the Fed has gone on to lower its benchmark overnight funds rate to 2 percent to shield the U.S. economy from a housing crisis, and made plain he was uncomfortable with inflation expectations.
"The anecdotal evidence, the headlines that we're reading in the newspapers, and the survey data, is not encouraging," he told the audience.
"That worries me a great deal. It's beginning to work its way into expectations, and when you begin to work your way into expectations, business and consumers behave accordingly and then you have a problem.
"So you want to make sure that is not encouraged and we will do the level best we can to do so," he said.
Fisher's remarks echoed a hard line taken in a speech on Monday evening by Fed Chairman Ben Bernanke that mounting energy prices were pressuring inflation and adding to expectations for the future.
Markets have taken this message to mean the Fed will hold rates at the current 2 percent level and then start to raise them before the end of the year.
Fisher ducked questions on when the Fed should start to lift borrowing costs, but said it now needs to move in a very measured manner.
"I do think it is very central banker-like, except for under duress, to be deliberate and to be gradual," he said.
Fed documents show that Fisher's last dissent was because he feared rate cuts were undermining the U.S. currency, stoking import price pressures that might then crimp growth by taxing consumers and hitting corporate profit margins.
Since then, the Fed has noticeably stiffened its rhetoric in support of the dollar, which has notched record lows against the euro this year as the U.S. central bank slashed interest rates while the European Central Bank stayed on hold.
Foreign exchange market conditions will be reviewed by finance ministers and central bank chiefs of the Group of Seven rich nations at a meeting in Japan this weekend.
In advance of this gathering, remarks by ECB President Jean-Claude Trichet that euro zone borrowing costs may in fact have to rise have buffeted the dollar further. But Fisher dismissed talk that the Fed and ECB were at odds over policy.
"I admire Trichet's emphasis on price stability. We are not competing against the Europeans," he said.