Fed's Fisher: Slower growth preferable to inflation

WASHINGTON (Reuters) - A slowdown in U.S. growth would do less long-term economic damage than permitting inflation to mount, a senior Federal Reserve policy-maker said on Tuesday.

"Containing inflation is the purpose of the ship I crew for," Dallas Federal Reserve President Richard Fisher said in prepared remarks to a conference in London.

"If a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient," he told the Society of Business Economists. A copy of Fisher's speech was released in advance to media in Washington.

"We cannot, in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored," he said.

Fisher is a voting member of the Fed's policy-setting committee this year and voted against the Fed's last rate cut on January 30, when it lowered the overnight funds rate by a half percentage point to 3.0 percent.

The Fed has slashed interest rates by 2.25 percentage points since mid-September to shield the economy from a housing crisis that has sparked a global credit crunch. But prices are also rising, with oil hitting a record $103.95 on Monday.

Fisher said that since the Fed's last cut, markets may have become more concerned by inflation risks and the prospect of "cheap money" from the central bank.

"We have heard more and more reports of inflationary concerns, and with them increases in longer-term rates and record low exchange rates for the dollar," Fisher said.

"All these signals could be aberrations -- twitches in markets," Fisher said.

"But they might also indicate that the markets are unnerved by the idea of further monetary accommodation in a world where commodity prices inch upward almost on a daily basis and labor costs escalate in Chinese factories," he said.

Consumer prices as measured by the personal consumption expenditures index, the Fed's favored inflation gauge, were up 3.7 percent year-on-year in January. Core inflation, which strips out food and energy prices, was up by a more moderate 2.2 percent, but Fisher said other components of the index had risen.

"Recent readings on inflation have not been encouraging," he said, noting the PCE had accelerated at a 5.4 percent annualized pace in the last 3 months.

"One would like to think that as the economy slows, inflationary pressures will do likewise. But we cannot always be sure they will, given the globalized nature of the U.S. economy," Fisher said.

(Reporting by Jamie McGeever, writing by Alister Bull; Editing by Dan Grebler)