Fed’s Fisher Says Economy Could Stall In Second Half Of 2008

(RTTNews) - The U.S. economy is in the midst of a “fierce correction,” Dallas Federal Reserve President Richard Fisher said Tuesday, adding that he thinks that U.S. growth will decelerate to a “snail’s pace, if not completely grind to a halt” in the second half of 2008.

“We are in the midst of a fierce correction from a prolonged period of indiscriminate behavior in the credit markets, a surfeit of home building, a global avalanche of cheap labor and correspondingly cheap imports, and other unsustainable financial and economic activity,” Fisher said at the Progress & Freedom Foundation summit in Aspen, Colorado.

Those forces, combined with a correction in the housing market that has yet to find its bottom, have made for “tempestuous” credit markets, he said. This will lead to slow, possibly stalled economic growth into 2009, Fisher predicted.

“I expect U.S. economic growth will decelerate to a snail’s pace, if not completely grind to a halt, in the second half of this year,” he said. “Indeed, we may see the slowdown extend into 2009 as the excesses that drove the housing markets unwind before the economy can again gear up to cruising speed.”

Fisher, one of the most hawkish voting members of the FOMC, has dissented at every FOMC meeting so far this year in favor of a less accommodative monetary policy. Inflation is one of Fisher’s chief concerns, and the recent consumer and producer prices data has underscored
his concerns.

The Labor Department’s recent reports on consumer and producer price inflation in the month of July showed increases in both consumer and producer prices that were double what economists had anticipated.

Although he acknowledged the recent tempering of energy prices and the possible calming effect that can have on inflation, Fisher emphasized that the Fed must stand strong against inflation.

“We cannot afford to gamble away our credibility,” he said of the FOMC. “That is why the FOMC has made it clear in its recent statements that we are keenly monitoring inflationary impulses.”

Keeping a close eye on inflation is key, Fisher said. Comparing the U.S. economy to a python in terms of its ability to swallow and digest a tough dinner like high inflation, Fisher suggested that it is too soon to tell whether inflation will cause increased disruption.

“I urge you to observe closely the noble python,” he said. “He might digest and dispatch the recent inflationary surge, or he might gag on it. It is too early to tell.”

“And until we have a clear sense of what will prevail, monetary policy makers must remain poised to act if slowing growth fails to contain inflationary pressures,” Fisher concluded.

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