Fed's Fisher: energy, food prices risk inflation

WASHINGTON (Reuters) - The U.S. economy remains healthy despite the housing crisis but inflation could be pushed up by food and energy prices, a top Federal Reserve policy-maker said in on Wednesday.

"I find that there is greater symmetry of risk between growth and inflation than is commonly surmised," Dallas Federal Reserve Bank President Richard Fisher said in a speech prepared for delivery to an Australian economists group in Sydney. A text was provided via E-mail.
"Our concern about inflation at the Dallas Fed stems from two more pervasive sources -- food and energy, where we foresee a risk of a more pernicious pass-through effect than we saw in the recent price increases of underlying commodities," he said.
Oil prices have pushed toward $100 a barrel in recent days but retreated on Tuesday, and Fisher said food prices as gauged by the U.S. consumer price index were up 5 percent through September.
Core inflation, which strips out food and energy prices on the grounds that these are volatile components of the index, is running in the 2 percent range. But Fisher said he was uncomfortable about ignoring the trend in energy and food prices and noted that it was rare for core and food inflation to diverge for very long.
"A spread of the current magnitude between food price inflation and the core index occurred on several occasions between 1957 and 1980. But we have not seen it in a quarter century," he said.
Fisher, a voting member of the Fed's interest-rate setting committee next year, also voiced support for a shift in Fed rhetoric seen as limiting the scope for further rate cuts.
"While the Federal Reserve remains ready to act if needed ... I believe it was appropriate for the FOMC (Federal Open Market Committee) to focus squarely on the economy at its October 30 and 31 meeting," he said.
The Fed lowered interest rates by a quarter-percentage point to 4.5 percent on October 31 and said that upside risks to inflation roughly balanced downside risks to growth. The language was seen as a signal that the Fed was reluctant to cut rates again to shelter the economy from a housing slowdown.
Investors have clamored for interest rate relief from a credit crunch sparked in August by problems in the U.S. subprime mortgage market for borrowers with risky credit. But Fisher said the fallout from strains in the credit market appeared contained.
"Beyond the troubles in financial markets, we have had an otherwise healthy economy in the U.S., with, thus far, the only other significant signs of weakening coming from continual corrections in the housing market," he said.
He acknowledged there may be more write-offs linked to subprime mortgage investments by financial institutions, but remained upbeat overall. "I suspect some real 'cow patties' remain in some prominent institutional punch-bowls in the U.S. and abroad, and they will undoubtedly come to light before too long." "I would submit, however, that we are on our way back to markets priced by reason rather than fantasy and that systemic risk has been lessened substantially," he said.