Fisher Says U.S. to Avoid `Prolonged' Slump in Growth

Federal Reserve Bank of Dallas President Richard W. Fisher said that the U.S. will probably see slower economic growth rather than a deeper downturn.

The most likely scenario is that the U.S. will avoid a prolonged period of negative economic growth, Fisher said during an interview today before a speech in Fort Worth, Texas, without mentioning the term recession. He also said he's hearing increasing expressions of concern about inflation from executives he speaks with, which got his attention.

Fisher spoke after data this week showed the U.S. is moving closer to a recession, while inflation is accelerating at the same time. He said today that the slowdown in growth will probably last for a couple quarters and warned that it may be difficult to quickly raise interest rates.

Fed officials anticipate growth of 1.3 percent to 2 percent this year, down from 2.5 percent in 2007. Two members of the panel charged with dating U.S. economic cycles said yesterday that it's too early to decide whether the U.S. is in recession.

We have to be wary of the fact that we are navigating through an extremely narrow passageway here: with on the one side of us inflationary shoals and on the other the risk of weaker economic growth, said Fisher, who alone voted against the Federal Open Market Committee's Jan. 30 decision to lower the benchmark rate by half a point.

`Very Best'

The Fed is doing its very best to find the right balance between the concerns about both growth and inflation, Fisher said. The central bank must be careful not to stir inflation embers, he said in his remarks today to the Petroleum Club of Fort Worth. Business executives have relayed concerns about building cost pressures, Fisher said.

Policy makers last month lowered their benchmark rate by 1.25 percentage point to 3 percent, with an emergency reduction of three-quarters of a point Jan. 22. The moves were the fastest easing of monetary policy in two decades.

The Fed's rate cuts may be more difficult to reverse in practice than in theory, said Fisher, 58. The former hedge fund manager, U.S. trade official and Senate candidate became head of the Dallas Fed in April 2005.

Minutes of the Fed's Jan. 9 and Jan. 21 conference calls and Jan. 29-30 meeting showed this week that some officials may favor a rapid reversal of rate cuts when the economy stabilizes.

`Bit Precarious'

It just seems to me to put yourself in that position where one might have to shift gears suddenly is a bit precarious, Fisher said today. The ability to raise rates quickly if the mood has shifted may be a more difficult thing to do in practice than in theory, he said.

The minutes also showed officials judged relatively low interest rates may be needed for some time to counteract the faltering economy. Data since the Jan. 30 meeting showed payrolls fell for the first time in four years in January, and private reports indicated a contraction in manufacturing.

The most likely scenario is slower economic growth and yet not prolonged negative activity, Fisher said. We have an anemic economy right now, he said.

The Philadelphia Fed's general economic index fell more than forecast this month to minus 24, the lowest level since February 2001, a report showed yesterday. The Conference Board's gauge of leading indicators dropped 2 percent in the last six months, which the group says can be one of the reasonable criteria for a recession warning.

The National Bureau of Economic Research's business cycle dating committee monitors payrolls, industrial production, sales and incomes in determining whether the economy has entered a recession.

More Cuts Expected

Traders place 100 percent odds that the Fed will cut the benchmark rate by at least half a point by the end of the next meeting on March 18, futures prices show. Policy makers have lowered the target rate for overnight loans between banks by 2.25 percentage points since September, to 3 percent.

Recent inflation figures were not encouraging, he added. He said he's talked to 30 chief financial officers over the past few weeks and has heard more concern about inflation than in the past.

Consumer prices rose 0.4 percent from December, spurred by food and energy costs, rents and clothing. Costs excluding food and energy climbed 0.3 percent, the most since June 2006, the Labor Department said two days ago. From a year earlier, consumer prices rose 4.3 percent, approaching a 16-year high. The core rate was up 2.5 percent.

Fisher told reporters after the speech that he questions whether inflation expectations are well anchored, and that the U.S. economy is in an anemic condition.

He added that there's no doubt there's something wrong in credit markets, and certain excesses may take years to unwind.