Fed's Fisher: Fannie, Freddie capital was too low

AUSTIN, Texas (Reuters) - A Federal Reserve examination of Fannie Mae and Freddie Mac had determined their capital was of poor quality and inadequate for the risks they faced, a top Fed official said on Monday.

"In sending our examiners in, we concluded that the capital of these institutions was too low relative to their exposure," Federal Reserve Bank of Dallas President Richard Fisher told a community luncheon hosted by the Dallas Fed.

"That capital, in and of itself, was of low quality. And when, for example, you looked at temporary impairments and so on, we found that many of them might not be so temporary," Fisher said.

The government's takeover of the two mortgage giants, announced on Sunday, was aimed to ensure financial stability, help the housing market, and protect taxpayers.

Fisher stressed the action had been taken by the U.S. Treasury, with the Fed acting only in a consultative role through its chairman, Ben Bernanke.

"It was in a consultative role that the chairman was called in... This decision was made by the United States Treasury. It is the United States Treasury that will lend the money and produce the backing," he said.

Fisher also pointed out that the U.S. central bank had warned for many years that Fannie and Freddie's size were a threat to the country and that they should be controlled.

"Over and over again, Alan Greenspan and Ben Bernanke, and those of us who have spoken on this issue, but particularly former chairman Greenspan, warned that the situation at Freddie and Fannie was not sustainable," he said.

Fisher, a voting member of the Fed's interest rate-setting committee this year, has earned the reputation as an anti-inflation hawk by dissenting against rate cuts, or voting in favor of rate increases, at every meeting so far this year. He repeated his concerns about inflation.

"One of the things that has been very disturbing is that recently we have seen a lot of price and cost pass-through," he said in response to a question from the audience.

"Almost at the same minute that the recent unemployment numbers came out -- above six percent, quite worrisome -- almost at the same minute, one of the largest paper and product suppliers in the country sent to their customers a notice that they were going to raise prices by 10 percent across the board," he said.

Fisher said there was no doubt the economy was weakening, but added that he expected it would climb back to speed at some stage during 2009. Inflation, on the other hand, was going to be a more lasting challenge.

"Short-term, I expect economic growth will be anemic. Short term, I think it is even odds that we'll have still-greater inflationary pressures, or that they will subside. But longer term, I am worried about the underlying supply and demand picture," he said, referring to the global competition for scarce resources like oil and other commodities.

The Fed is expected to keep rates steady at 2 percent at its next policy meeting, on September 16.

(Additional reporting by Mark Felsenthal in Washington; Editing by Chizu Nomiyama)