Fed's Fisher adds to warnings on inflation

By Noel Randewich and Jason Lange

MEXICO CITY (Reuters) - Dallas Federal Reserve President Richard Fisher on Thursday joined a chorus of officials warning that high inflation ties the hands of the U.S. central bank in its bid to blunt a sharp slowdown in the world's largest economy by lowering interest rates.

The Federal Reserve is now "ahead of the curve" on interest rates and must carefully balance a desire to spur economic growth with the need to keep inflation contained, Fisher said.

"The Fed has to be very careful now to add just the right amount of stimulus to the punch bowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in," Fisher told the Instituto Tecnologico Autonomo de Mexico.

"I'm certainly comfortable and confident that where we are now at 3.0 percent is where we should be and we are ahead of the curve," he added.

LOCKHART: NEW NORMAL

Another Fed official, Atlanta Fed President Dennis Lockhart, said the Fed's 2.25 percentage point rate cuts to 3 percent since September last year should help stabilize financial markets rattled by a credit crunch and a prolonged housing market slump.

Cash auctions should also help thaw frozen credit markets, where adjustments have been "painful but necessary," he said in a speech in Atlanta.

"So, as we move out of the current turmoil, I see the U.S. markets headed toward a 'new normal,' not a return to normal," Lockhart said.

Fisher's comments in particular dovetailed with remarks this week from two other Fed inflation hawks, Philadelphia Fed President Charles Plosser and Richmond Fed chief Jeffrey Lacker, and suggested a bloc of resistance to the further interest rate cuts financial markets are already expecting.

San Francisco Fed President Janet Yellen is scheduled to give a speech in Hawaii at 8:35 p.m. local time (1:35 a.m. EST) on Thursday.

The Fed has cut benchmark borrowing costs in five moves since mid-September 2007, including a combined 1.25 percentage points last month. Interest-rate futures prices show markets expect rates to fall to 2.5 percent or lower by the end of the Fed's next meeting on March 18.

Fisher, who dissented from the Fed's last rate cut on January 30, preferring to hold rates steady at 3.5 percent, acknowledged the economy was slowing "suddenly and precipitously" as financial institutions pull back from or raise the cost of credit.

At the same time, strong demand for commodities from emerging markets has contributed to "unprecedented" inflationary forces that are pushing U.S. prices up, he said.

FISHER-NO INFLATION DROP

Fisher said he voted against the half-point rate cut last week because he thought that, with worrisome levels of inflation, the Fed had eased borrowing costs enough to hold economic growth risks at bay. In response to a question from a reporter, he said he believed the economy would dodge recession.