Fisher says Fed prevented economic depression

Reuters, Friday May 15 2009

* Recovery to be slow, sustained growth unlikely in 2009

* Near-term inflation outlook seen "meek" on output gap

* Fisher urges Congress not to tamper with Fed structure (Adds details, quotes, byline)

By Ros Krasny

SAN ANTONIO, Texas, May 15 (Reuters) - The U.S. economy has pulled back "from the edge of the abyss" on the back of the Federal Reserve's aggressive policy actions, and could be setting up for recovery -- albeit a very slow one at first, a top Fed policy maker said on Friday.

"The initiatives taken by my fellow 'banksters' at the Federal Reserve prevented us from falling into the chasm of an economic depression," Dallas Fed President Richard Fisher told the Texas Bankers Association meeting in San Antonio.

"I envision a slow recovery. Not a V-shaped snapback -- nor even a U-shaped one -- but a very slow slog as we find a more sensible and sustainable mix between consumption and savings and investment," he added.

Fisher, who is not a voting member of the Federal Open Market Committee in 2009, termed the near-term inflation outlook "meek" and said the Fed -- the U.S. central bank -- had beaten back deflationary pressures that loomed until recently.

On Friday, the U.S. Labor Department said its consumer price index was flat in April after falling by 0.1 percent in March. Consumer prices fell by 0.7 percent on the year, the largest 12-month decline since June 1955.

Fisher said the economy's wide "output gap," or the gulf between current and potential production, was key.

"It is doubtful that inflation will raise its ugly head until employment and capacity utilization tighten," he said.

Still, prospects for higher inflation down the road mean the Fed must plan appropriately to reverse the monetary initiatives that have flooded credit markets with billions of dollars to help jump-start the economy.

"Nobody I know on the committee wants to maintain our current posture for any longer and to any greater degree than is minimally necessary to restore the efficacy of the credit markets and buttress economic recovery without inflationary consequences," Fisher said.

The FOMC "can ill afford to be perceived as monetizing that debt, lest we come to be viewed as an agent of, rather than an independent guardian against, future inflation," he said.

GREEN SHOOTS

Fisher, who has termed his outlook for the economy the most gloomy among his Fed colleagues, seemed more upbeat on Friday.

"Our actions have succeeded in pulling the financial markets and the economy from the edge of the abyss. There are, as many have noted, some 'green shoots' that have begun to sprout that will help end the contraction in output and set the stage for a recovery," he said.

Among positive elements cited were an apparent slowing in the pace of job losses, a pickup in sales at trucking companies and a less severe decline in new orders cited by purchasing managers.

At the same time, gradual healing in the financial markets has been marked by a recent "dramatic" decline in the London interbank offered rate