Fed's Fisher: September rate cut not a done deal

By Ros Krasny

LAS CRUCES, New Mexico (Reuters) - Dallas Fed President Richard Fisher said on Thursday there is still a lot of analysis ahead before the next Federal Open Market Committee decision on benchmark U.S. interest rates.

It has yet to be determined if there is enough evidence in the U.S. economy of a need to cut rates, Fisher told reporters after a speech to local business leaders.

"It's a judgment call, and that judgment is still being formed," he said. "I'm still forming my own opinion."

The FOMC has held the fed funds rate, its primary monetary policy tool, at 5.25 percent since June 2006.

Its next policy-setting meeting will be on September 18. Financial markets are confident that an interest rate cut is coming to shore up an economy buffered by a credit crisis spawned by the collapsing subprime mortgage industry and falling house prices.

Fisher said the central bank's primary role is to keep inflation under control.

"Inflation has been moving in the right direction" but it is "to be determined" if price pressures have receded enough to support a rate cut, he added.

Fisher said that despite the headwinds created by persistent weakness in the housing market, the U.S. economy is getting a boost from "not insignificant growth" in the industrial sector and exports.

"The mortgage industry alone is not the economy," said Fisher, who will be a voting member of the FOMC in 2008.

"It is very important that we read the entrails of the data to form the right policy action," he said.

Among the latest data, Thursday's report on the service-sector economy from the Institute for Supply Management was "encouraging," Fisher said.

The rising cost of money created by the credit crunch has created "higher hurdles," but recent financial turmoil comes against the background of a very strong economy, he added.

Moreover, the Fed needs to take a level-headed approach and protect the overall financial system, not to bail out risk-takers, react to the news of the day or strive to be popular, Fisher said.

"The job of the Federal Reserve is not to bail out risk-takers: You're a big boy, you take risks, you bear the consequences," he said.

Fisher declined to comment on market expectations for a rate cut of at least a quarter percentage point at the next FOMC meeting, beyond saying that financial markets are "manic-depressive mechanisms."

"Market expectations come and go," he said. "The Fed's job is to get the economy right."

Fisher also said that what the Fed says is as important as what it does.

Markets took that message to heart on Thursday. Short-term rate futures fell heavily after several Fed speakers appeared to cast doubt on the need for an aggressive rate cut.

The implied chances for a half-percentage-point ease in the fed funds rate fell as low as 38 percent from 72 percent on Wednesday.