Dallas Fed president foresees 'anemic' growth into 2009

— -- Richard Fisher, president of the Federal Reserve Bank of Dallas, has earned a reputation as a maverick among central bankers, dissenting from the majority at each of the five meetings in 2008 at which interest rates have been considered.

Fisher agrees with his colleagues that the economy will slow further — he says it'll reach a "snail's pace" — as it continues to be weighed down by a depressed housing market. Unemployment is likely to rise, he says.

But, Fisher says, inflation is too big a risk to ignore, even with recent declines in the prices of oil and other commodities. Lower interest rates tend to spur growth; higher rates combat inflation.

The consumer price index rose 5.6% in July from a year earlier, the largest increase since 1991.

Fisher, who is voting on interest rates this year following the usual rotation among regional Fed presidents, notes that the days of deflationary forces coming from abroad appear to be waning. Foreign wages and living standards are rising, and that's leading to greater demand for goods and services worldwide. The dozens of business executives at major companies he speaks to are continuing to face rising costs for the goods they buy, costs that must be passed along to consumers, Fisher says.

The Fed is expected to leave interest rates unchanged at 2%, the lowest since late 2004, when it meets Sept. 16, according to a market in which investors bet on future Fed moves.

Fisher, a former banker, money manager and government trade negotiator who joined the Fed in April 2005, spoke to USA TODAY's Barbara Hagenbaugh on Wednesday. The following are excerpts of that conversation, edited for clarity and length.

Q: How is the economy doing?

A: I still envision anemic growth the next couple of quarters. It's likely that our movement through all this muck and debris from the credit and housing debacle will be sluggish. And it's going to take us sometime into 2009 to get the economy back into what I call a snappier cruising speed.

On the inflation outlook, we've had some very thorough retracements of prices on commodities. I think we have to be careful not to get too excited about that.

For one, they might not last. After having had their margins gutted, you can understand how companies would be a bit skeptical about the recent retracements and their instinct to want every opportunity to buy protection from being victimized again. Under that scenario, consumer prices could, at a minimum, be very sticky on the downside.

The jury is out as to whether the lesser momentum in the economy will be sufficient to translate into (lower prices). It definitely has not so far.

Q: If companies maintain their prices, even at a high level, isn't inflation no longer an issue?

A: What I worry about is, if and when we pick up the pace again, what will be the base rate of inflation, and what will we pick up from there?

The question is not just immediate price pressures, but how much relief from these very bad numbers we've had in June and July are we likely to get? What level will we sink back to? If we were, for example, to start growing again and the sort of inflationary floor is 4%, then we have a problem on our hands.

Q: Why is it not a given that a slowdown in the economy will ease inflation?

A: First, it's a question of how much it slows, and secondly, there are other price pressures elsewhere. China is a good example. What I'm hearing (from businesses) is that they are not yet seeing (price) relief on the downside.

Q: If a lot of our inflationary problems are imported, how would higher U.S. interest rates help?

A: The one thing that we have to deal with is the perception of what we do. We cannot be ever perceived as accommodating inflation. If we are perceived as being accommodating, then that just gives Main Street a little more of a nudge towards acting in a way that inculcates inflation. Remember that a lot of this is psychology, and it doesn't fit into a neat, formulaic model. This is all a matter of judgment.

Q: How do you respond to the argument that dissent shows a central bank that is fragmented and adds to confusion about the direction of interest rates?

A: I don't buy that. First of all, the majority rules. Secondly, it shows that we are having a discussion of the risks on both sides. My respect for (Fed Chairman) Ben Bernanke is enormous; he is an enormously clever man.

He stepped into this post as chairman at a very awkward time, and I admire him tremendously for how he has conducted himself. He encourages an open discussion.

Q: Is the worst over for housing?

A: When you correct for excess, you expect a severe correction. The amazing thing is the economy has held up despite this correction, and it is painfully severe.

I don't think it has fully run its course. Some people detect that it may be bottoming, I think it has a ways to go. It's obviously pulled the legs out from under the economy.

Q: Is this a tough time to be on the Fed?

A: It's enormously challenging and gratifying. This is a test for all of us, and there are a lot of people watching what we do. We are doing our level best to get it right.