Fed's Fisher: Rate hikes could come sooner vs later

By Ros Krasny

SAN FRANCISCO (Reuters) - The Federal Reserve would likely increase interest rates "sooner rather than later" if inflation worsens, even if the U.S. economy remains weak, Dallas Federal Reserve Bank President Richard Fisher said on Wednesday.

"If inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario," Fisher said.

A copy of the speech, prepared for delivery to the Commonwealth Club of California in San Francisco, was made available in advance.

Fisher is one of the Fed's leading policy hawks, urging the central bank to focus more on the need to quell inflation, which he termed "a sinister beast."

He has tallied three straight dissents against the Federal Open Market Committee's moves to lower benchmark lending rates.

"Growth cannot be sustained if markets are undermined by inflation," Fisher said. "Stable prices go hand in hand with achieving sustainable economic growth."

At this point financial markets believe the FOMC will leave its federal funds rate steady at 2 percent in June. The rate has been cut from 5.25 percent since mid-September to shore up sagging economic growth. Markets also guess that the Fed will start raising rates in the fourth quarter.

Fisher did not discuss the near-term economic outlook but focused on "the mother of all financial storms" brewing from unfunded liabilities from Medicare and Social Security, and its intersection with monetary policy.

"Deficits ... create political pressure on central bankers to adopt looser monetary policy," Fisher said, vowing that the Fed would not cave in and "run the printing presses."

"Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy," he said. "The Federal Reserve will never let this happen. It is not an option. Ever. Period."

Fisher said the Fed's various term credit facilities launched since the global credit crunch erupted in 2007 "are helping restore confidence."

By contrast, he said, the long-term fiscal prospects for the United States, if not tackled head-on "will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets."

(Editing by Leslie Adler)