Federal Reserve’s Fisher and Plosser opposed drastic March rate cut

Richard Fisher, president of the Fed’s Dallas bank, and Charles Plosser president of the Fed’s Philadelphia bank, both voted against the most recent cut in the Fed’s federal funds rate according to minutes of the March 18th Federal Open Market Committee meeting released on the Fed’s web site. The committee voted 8-2 to approve the rate cut of three-quarters of a percent to 2.25%.

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Fisher and Plosser were opposed to the cut because of “heightened inflation risks,” preferring less aggressive action by the Fed saying that the effects of previous rate cuts had yet to be felt by the economy.

According to the minutes Mr. Fisher “felt that focusing on measures targeted at relieving liquidity strains would improve economic prospects more quickly and lastingly than would further reductions in the federal funds rate.”

Fisher and Plosser were concerned that inflation expectations could potentially become unhinged should the Committee continue to lower the funds rate in the current environment. They pointed to measures of inflation and indicators of inflation expectations that had risen, and Mr. Fisher stressed the international influences on U.S. inflation rates.

Fear of a “prolonged and severe economic downturn”

The outlook for economic activity had weakened considerably since the January meeting, and members viewed the downside risks to economic growth as having increased. Indeed, some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market.

“Monetary policy alone could not address fully the underlying problems”

Members recognized that monetary policy alone could not address fully the underlying problems in the housing market and in financial markets, but they noted that, through a range of channels, lower short-term real interest rates should help buoy economic activity and ameliorate strains in these markets.

On the Web
Federal Open Markets Committee - minutes of March 18, 2008 meeting

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