The Federal Reserve is doing “stress test after stress test” to U.S. banks to ensure there are no “trip wires” that might come from inter-banking exposure to Europe, the Dallas Federal Reserve President and CEO told Larry Kudlow Monday.
“Given the advance that’s been taking place in terms of our emphasis on capital structure, [and] the reaction that our bankers have had, I think we are ahead of the curve as far as Europe is concerned,” Fisher said, “but nonetheless there are these cross fertilizations and it’s a serious thing.”
The source of European contagion, he said, would be a slowdown that would take place in Europe. Right now, there is a risk of a European recession and the U.S. needs to keep its eye on how it could impact this country.
But Fisher downplayed a recent academic study out of the San Francisco Federal Reserve that said the European debt crisis is raising the odds of a U.S. recession .
The study, he said, assumes that there will be a major default in Europe and right now, he’s assuming that’s not going to happen.
“Progress is being made in Europe. You’ve seen the Greek government replaced, the Italian government replaced,” he said. “This is the power of the bond markets and it has a voice. It’s being heard and it’s creating a political backlash. It is a lesson for our own people here.”
Fisher also told Kudlow that the Federal Reservehas done its job to spur the economy, keeping interest rates low. And he said he will not support the Fed buying more mortgage debt to spur a struggling economy.
“We’ve already knocked mortgage rates down to the lowest level in 50 years, so I would not personally support further action on that front,” he said.
Earlier this month, Fed Chairman Ben Bernanke said the U.S. central bank was considering buying more mortgage debt to jolt the broader economy onto a more robust growth path.
“We have rates extremely low,” Fisher said. “We cannot, on our own, levitate this economy.”
Fisher said, as he has repeatedly, that it’s time for the fiscal authorities to do their job and create incentives for businesses.
“Business does not work well under conditions of total uncertainty,” he said. “They’re worried about demand, no question about that, they’re worried about what might happen in Europe, but the one thing they don’t know is what their costs are going to be.”
Those costs include taxes, regulator costs and spending patterns, he added.
“When business knows what is going to happen, whether they like it or not, they will figure out a way to navigate around it,” he said “but right now it’s a rough sea, they have no idea what’s out there.”
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CNBC.com with wires.