Fisher says Fed must be mindful of inflation

DALLAS (Reuters) - The Federal Reserve must not "overreact" to the credit crisis and take risks with inflation, one of its top policy-makers said on Tuesday, in a clear hint at his reluctance to cut interest rates any further.

"The actions we've taken should provide some buoyancy through the course of next year to the economy. But I want to make sure that we don't overreact and create further problems down the road," Richard Fisher, president of the Federal Reserve Bank of Dallas, told Reuters in an interview.

Fisher, an avowed anti-inflation hawk, is a voting member on the Fed's interest rate-setting committee next year.

"Cutting rates, doing the things we've done, will facilitate economic growth next year from where it otherwise would have been. But I am also mindful of the fact that we've got some inflationary pressures building, and so we have to be careful that we don't stir those embers," he said.

The overall consumer price index rose 0.8 percent in November while prices excluding energy and food increased by 0.3 percent, taking the year-on-year growth in this measure of so-called core inflation to 2.3 percent.

Higher energy costs explained part of the rise, but food prices have also mounted and the front page of Tuesday's Dallas Morning News was emblazoned with the headline "Grocery bills to keep growing".

"The real issue for us is always if it gets into expectations, and I was alarmed to see that headline this morning. That is not what I want to see. That begins to feed expectations," Fisher said.

His remarks will likely stiffen the sense of a split between policy-makers who want to cut rates further and the camp who reckons that enough has been done.

The U.S. central bank has lowered its key overnight federal funds rate target by a full percentage point since a slumping U.S. housing market sparked a global credit crunch in August.

Fisher, noting that monetary policy acts with a lag, stressed that policy-makers must take the long-term consequences of their actions into account.

"The fed funds rate should be geared to the economy...I don't know with precision what the time lags are, but I know there is a time lag, and it takes a while for it (policy action) to come into the economy. And that is why we have to be deliberate and think within the long-term context of what we do," he said.

"I do not believe the fed funds rate is the palliative for solving immediate problems," Fisher added.

Pundits have slammed the Fed for lacking a sense of urgency over the credit crunch but Fisher said there was an excess of pessimism about that should not cloud good judgment.

"There is an enormous amount of alarmism out there," Fisher said. "The trying part of this is that people expect us to solve problems instantaneously."

Last week the Fed outlined a series of measures to be taken with other central banks to ensure there is enough liquidity over the critical year-end period for financial institutions.

Fisher said it was 'too early to tell" how this was working and declined to comment further because the steps were still at an early stage.

(Editing by Andrea Ricci)