Credit crisis rolls back threat of rising US inflation: central banker
Plunging commodity prices have eased inflation pressures
(ATLANTA) A rising threat of inflation earlier this year ‘froze in its tracks’ in recent months as the credit crisis worsened, Federal Reserve Bank of Dallas president Richard Fisher said.
‘The impetus for rising prices came to a grinding halt as the credit crisis took grip and confidence evaporated,’ Mr Fisher said on Tuesday to a meeting of the Texas Cattle Feeders Association in Grapevine, Texas. ‘As the credit market congealed, inflationary momentum froze in its tracks.’
Mr Fisher and other members of the Federal Open Market Committee (FOMC) cut the benchmark interest rate last week to one per cent, trying to prevent a downturn in bank lending and consumer spending from triggering a global recession. He had dissented five times in prior meetings because of concern about inflation.
Plunging commodity prices, including a 55 per cent decline in the cost of oil since July, have eased inflation pressures. ‘I don’t believe we are likely to have sustainable deflationary impulses,’ Mr Fisher told reporters after his speech.
While cutting the main rate during the past 13 months from 5.25 per cent, Fed chairman Ben Bernanke has created six loan programmes channelling at least US$700 billion in cash and collateral into money markets as at Oct 22.
‘There are limits to what the central bank can do,’ Mr Fisher said. ‘Complementary action must now be undertaken by the fiscal authorities,’ including the new president elect.
The Fed’s efforts to unlock short-term credit markets, including buying debt directly from companies, showed signs of working, as interest rates on US commercial paper fell on Tuesday to the lowest in four years.
The Fed’s balance sheet may expand to US$3 trillion by year’s end, reflecting growth of various liquidity measures supporting banking institutions, Mr Fisher said. As at Oct 29, the Fed’s balance sheet was US$1.97 trillion.
Still, the US faces ‘an epic challenge’, Mr Fisher said. ‘We are navigating the mother of all financial storms.’
The US economy shrank at a 0.3 per cent annual rate last quarter, the most since the 2001 recession, the Commerce Department reported last week. Economists expect the slump to worsen in the fourth quarter.
A recovery in the US economy ‘will take time’, Mr Fisher said in response to an audience question. ‘I don’t see any economic growth in 2009. None.’
During the current quarter, the US is ‘likely to have negative growth’, he told reporters.
Labor Department figures are expected to show a drop of 200,000 jobs in October, according to a Bloomberg News survey of economists. — Bloomberg
Source : Business Times - 06 Nov 2008
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