Members of the Fed officialdom are doing their best to preserve the Fed’s policy options (i.e, not cave in to market pressures at the next FOMC meeting) by talking down expectations of another rate cut. Dallas Fed President Richard Fisher, in Sydney, spoke of solid US economic fundamentals and increasing inflation risks. Note that Fisher does not sit on the FOMC.
Ah, but will the traders listen? They assume the Fed’s hand will be forced if financial firms continue to post large writedowns, and if that comes to pass, they are probably right. From Bloomberg:
Federal Reserve Bank of Dallas President Richard Fisher said while the Fed remains “ready to act if needed” in response to credit markets, the economy will probably keep growing and inflation risks are rising.
“The balance of risks is not skewed unilaterally toward slower growth,” Fisher said in the text of a speech today in Sydney. “We must remain far from smug on the inflation front and must conduct monetary policy” with that in mind, he said.
The comments add to policy makers’ expressions of concern that U.S. price pressures will rise as energy and commodity costs climb. Chairman Ben S. Bernanke said last week that inflation and growth risks are “roughly” balanced, even as traders anticipate the Fed will cut interest rates again next month…
In financial markets, “we have a way to go before full recovery and must acknowledge that shocks and accidents might happen,” said Fisher said in remarks to the Australian Business Economists annual dinner.
“I suspect some real `cow patties’ remain in some prominent institutional punchbowls in the U.S. and abroad, and they will undoubtedly come to light before too long,” Fisher said, referring to cow dung…..
Investors “are not out of the woods quite yet, and they have miles to go before they, and we as central bankers, sleep,” Fisher said. “I would submit, however, that we are on our way back to markets priced by reason rather than fantasy and that systemic risk has been lessened substantially.”….
The regional Fed president said he consults with 35 chief executive officers before each Fed meeting and, except for homebuilders, “not a single one of them feels the economy is at risk of falling off the table.”….
Traders see an 82 percent chance of a quarter-point reduction in the Fed’s target rate for overnight loans between banks, to 4.25 percent, at the Dec. 11 meeting, federal funds futures contracts show
Update, 11/14, 1:45 AM: The MarketWatch coverage of Fisher’s speech stressed its hawkish elements:
The risk of higher inflation is being overshadowed by concern of a recession, said Dallas Fed President Richard Fisher on Wednesday.
“We must remain far from smug on the inflation front,” Fisher said in a speech prepared for delivery in Sydney Australia. He said he had a “sense of discomfort” about rising food and energy prices. The Dallas Fed provided copies of the remarks ahead of the speech.
Fisher said he routinely talks to 35 CEOs in his district prior to monetary policy meetings. Prior to the last FOMC meeting, he said, not one of the business leaders was worried about a recession.
Instead, he said, many were worried about higher prices.