Fed's Fisher: Ready to ease if inflation calm

By Tamawa Kadoya

PHILADELPHIA (Reuters) - Federal Reserve Bank of Dallas President Richard Fisher said on Thursday he would call for further monetary easing to support the economy as long as inflation expectations were subdued.

"As a voter on the FOMC (Federal Open Market Committee) this year, I stand ready to take substantive action to support growth and provide insurance against downside risk, as long as inflation expectations remain contained," he told a luncheon hosted by the Global Interdependence Center.

"The degree of substantive action to support economic growth and insure against downside risk will be conditioned to what we see coming down the inflation pike," he added.

The Fed will hold its next rate-setting meeting on January 29-30, at which it is widely expected to cut the benchmark federal funds rate by half a percentage point.

The Dallas Fed chief, using the phrase "substantive action," echoed Fed Chairman Ben Bernanke, who used the same phrase last week and repeated it in congressional testimony on Thursday to signal that the U.S. central bank would take an aggressive stance in cutting interest rates to support a faltering economy.

However, Fisher, who is known as an anti-inflation hawk, added a caveat that the risk of rising inflation expectations would have to be heeded.

To meet its dual mandate of price stability and maximum employment growth, "the Fed must keep one ear cocked toward signs that inflationary expectations are drifting upward as we execute additional monetary measures," he said.

Noting that policy acts with a lag, particularly against inflation, Fisher said "we must not ... sow the seeds of inflation that will eventually choke off the very employment growth we seek to encourage."

He expressed some concerns about inflation, saying that rising incomes and strong demand from China and India would keep upward pressure on prices of food and energy.

If so, the Fed would "have to err on the side of running tighter policy" to limit inflation pressures, he said.

Regarding the Fed's new Term Auction Facility aimed to pump liquidity more smoothly into the banking system, Fisher said the facility has been helpful, but it is premature to say they have solved the problem of tighter credit.

The Fed was not currently thinking about expanding its range of tools, saying the central bank was not about to "throw a plethora of tools" at the market.

Fisher's speech came as Bernanke told the U.S. House of Representatives Budget Committee that he would support the government's efforts to craft an economic stimulus package.

"I am fully in accord with the Chairman on that matter," Fisher told reporters after the speech. "Fiscal action that would have an impact in a short time frame, would be temporary and would not lead to longer-term problems would be welcome at this point."

In his speech, Fisher also said he had "no intention of being party to any action that might shake faith in the dollar.