Fed must be ready to take back cuts: Fed's Mishkin

By Tamawa Kadoya

NEW YORK (Reuters) - The Federal Reserve should be ready to reverse two interest rate cuts if the U.S. economy escapes major damage from recent market turmoil, but recovery is a way off for housing and subprime mortgage markets, Fed officials said on Monday.

The Fed's two rate cuts in September and October, which lowered the key federal funds rate three-fourths of a percentage point to 4.5 percent, should buffer the economy from the impact of the turbulence that roiled financial markets over the summer, Fed Governor Frederic Mishkin said on Monday.

Still, policy-makers should be prepared to raise rates if that policy medicine proves unnecessary to prevent inflation from igniting, he added.

"In circumstances when the risk of particularly bad economic outcomes is very real, a central bank may want to buy some insurance and, so to speak, 'get ahead of the curve,'" Mishkin said at a conference on risk management in New York.

"If, in their quest to reduce macroeconomic risk, policy-makers overshoot and ease policy too much, they need to be willing to expeditiously remove at least part of that ease before inflationary pressures become a threat," he added.

The financial turbulence of summer has eased, but stresses remain and markets have not fully recovered, Mishkin said.

COSTS OF FED STASIS TOO HIGH

The most recent rate cut last week by the Fed's Federal Open Market Committee (FOMC) was not a clear-cut choice but was warranted on the grounds that it could be reversed if inflation began to flare, Mishkin said.