Fed hawk wary of rate cut but another softens tone

One top U.S. Federal Reserve official on Monday warned against another interest rate cut to offset the credit crisis, but a second policy-maker who has defied cuts all year said inflation was receding as a concern.
"I'm not as worried as I was before that we might, when the financial system was repaired, have … inflationary pressure," Dallas Federal Reserve President Richard Fisher told a community bankers in Wichita Falls, Texas.
Fisher had dissented against monetary policy easing all year, although he voted with the rest of the U.S. central bank's interest rate-setting committee to keep rates on hold at 2 percent at their last meeting, on September 16.
Stock markets slid on Monday as investors digested the prospect of the credit crunch inflicting a lasting U.S. recession that curbs growth worldwide, despite a $700 billion U.S. taxpayer bailout agreed by Congress on Friday.
Financial futures markets currently imply the Fed will impose an emergency 50 basis point inter-meeting cut before the next scheduled gathering, October 28-29.
Fed Chairman Ben Bernanke may confirm or deny these suspicions in a speech that he is scheduled to give in Washington on Tuesday.
But St Louis Federal Reserve President James Bullard warned that another cut may do more harm than goods.
"I don't think lowering rates is the right tool for this environment," he told Reuters in an interview, reiterating a warning against further policy easing that he made last week.
"My experience is, you're in the middle of this much volatility, this much turmoil. You lower rates. I don't think it has very much effect," he said.
"When you're trying to solve one problem, you don't want to create a new problem and compound the situation. I think that that is what happened in the 1970s," he said, referring to period of soaring U.S. inflation that was costly to reverse.
Bullard is not a voting member of the Fed's interest-rate setting committee this year.
The Fed has already slashed rates by 3.25 percentage points since September 2007 to shield the economy from the worst U.S. housing crisis since the Great Depression.
It halted the easing campaign at 2 percent and made plain that it wanted to concentrate on massive injections of liquidity into credit markets to keep the system functioning.
If it now decides to cut rates again, it would probably justify the action by pointing out the additional damage done to the outlook for economic growth by renewed market strain.
Federal Reserve Bank of Chicago President Charles Evans did not discuss policy, but he did say that the stress would take a bite out of growth.
"Given the financial stress we're looking at, it's difficult to see that the first-half 2009 outlook will be better than we thought," Evans told reporters after a speech to the Association for Manufacturing Technology meeting in Lost Pines, Texas. "I'll be marking down my forecast for 2009."
Evans is not a voting member of the Federal Open Market Committee this year, but will be in 2009.
Bullard also said that recent developments in financial markets had added to downside risks for the economy — although he did not feel this warranted monetary policy action.
"The second half of the year will be slow, very slow, but it will be positive, and then hopefully things are better in 2009," he said in the Reuters interview.
"The overwhelming thing about the current outlook is the turmoil of the last couple of weeks and what the fallout from that will be, and that is very hard to put into a forecast," he said.