Fed’s Fisher Sees Inflation Threat Growing In Second Half Of 2008

(RTTNews) - Dallas Federal Reserve President Richard Fisher reiterated his staunch hawkish stance Tuesday, cautioning that, despite the decline in energy prices, inflation could continue to rise in the second half of 2008 as the economy slows to a near standstill. In an interview with Dow Jones Newswires published Tuesday, the voting FOMC member with five consecutive dissents cautioned that economic growth could “certainly” approach zero in the second half of 2008.

“Growth will taper down…to a snail’s pace in the second half,” he said in the interview, adding that it “may be anemic for a while.”

“I could see (GDP) approaching, certainly, broaching zero,” he continued, citing “enormous stress” in the financial markets and suggesting that their struggles are not over, noting they remain “strained and difficult.”

However, as concerned as he is about economic growth, Fisher was even more concerned about inflation and its impact on consumer spending. He issued one of the most direct warnings from the Federal Reserve of the danger of persistent inflation, presenting a stagflation-like scenario of slow growth and high inflation as consumers cut back on spending when faced with higher prices.

Fisher said that there is a “50/50″ chance that inflation will be more than a “one off event,” hinting that he is “concerned” that price expectations will embed themselves into the economy, weighing down on consumers.

However, others in the Federal Reserve, including Chairman Ben Bernanke, have viewed the recent pullback in energy prices as a development that will likely temper inflation expectations as the economy sheds some of the weight that record oil prices have placed on it. Prices are still well above their normal levels, though, and there is no indication that supply concerns won’t send crude oil soaring again.

Fisher called the slide in energy prices “encouraging,” but he approached the issue with cautious optimism.

“I think it’s too early to take comfort in these reversals,” he added.

The outlook remains uncertain, Fisher noted, adding that further movement by the FOMC is dependent on upcoming economic events.

The Federal Reserve has held its key interest rate steady at 2 percent at its last two meetings as it searches for the right monetary policy in the tricky economic environment. The minutes from the August FOMC meeting will be released Tuesday, and should provide insight into the decision-making process of the policymakers.

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