Feb 2006 Financial News

Fed's Fisher says economy on solid track

Feb 07, 2006

LONDON (Reuters) - Dallas Federal Reserve President Richard Fisher said on Monday that U.S. fourth quarter growth could be revised higher and the country's rampant housing market did not pose the peril that many seemed to think.

"I would not be surprised if GDP were revised upward when we take a more definitive look at the fourth quarter," he told the Institute of Economic Affairs in a speech. U.S. GDP grew by a tepid 1.1 percent annualized rate in the last three months of 2005, although most economists think it will rebound.

In somewhat hawkish remarks, he also said U.S. growth would remain strong, provided the Fed keeps inflation under control and trade was not obstructed.

"As long as the Federal Reserve does its job of holding inflation at bay, and as long as our political leaders resist protectionism and other forms of interference with creative destruction, we will remain a productive economic machine," he said in his prepared remarks.

The U.S. central bank raised interest rates by a quarter percentage point to 4.5 percent last week, its 14th consecutive increase since June 2004, and markets bet it will increase them again to 4.75 percent at its next meeting at the end of March.

This will be the first meeting chaired by new Fed Chairman Ben Bernanke, who replaced Alan Greenspan on February 1. Analysts expect Bernanke to steer the Fed toward adopting a formal inflation target to anchor monetary policy -- a course he favored as an academic before joining the central bank.

But Fisher ducked the question in an interview on Bloomberg Television following the speech.

Asked if the Fed was considering such a move, he said: "I would be very careful about that," adding the Fed had not yet discussed this as a group.

Fisher, who is not a voting member of the Fed's interest-rate setting committee this year, noted that many economists were concerned that U.S. consumer spending could suffer if the property market cooled too fast.

Those anxious about the housing market have urged the Fed halt its tightening cycle before it does substantial damage to property prices.

But Fisher sounded less worried and said the high number of home owners with fixed rate mortgages provide a buffer, while the number of those with variable rate mortgages were only a small fraction of the overall market.

"It is not unreasonable to think the situation is manageable, albeit worth watching closely," he said.

Fisher also raised the issue of the record U.S. current account deficit -- the broadest measure of the United States balance for trade and services with the rest of the world -- and repeated the line taken by other Fed officials, including Bernanke, that it was partly due to excess global savings.

"Those urging the United States to rein in its spending should be equally full-throated in prodding countries with excess savings and trade surpluses to create conditions for growing their domestic demand.

"If they fail to do so, and the U.S. suddenly becomes virtuous on its own, the global economy would sink into a deep funk," he said.

Asian countries such as China have high levels of savings, as do oil exporting countries due to high global crude prices.

By Ross Finley
Reuters
Monday, 6th February, 2006.
http://news.yahoo.com/s/nm/20060206/bs_nm/economy_fed_fisher_dc_3