Fed official: Inflation still a risk

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NEW YORK (CNNMoney.com) -- Richard Fisher, the only member of the Federal Reserve to vote against cutting rates at its Jan. 30 meeting, said in a speech to bankers in Mexico City Thursday that he's still worried about inflation.

Fisher, the president of the Dallas Federal Reserve Bank, said in his prepared remarks that he was not in favor of last week's half-point cut to the federal funds rate because he "had yet to see a mitigation in inflation and inflationary expectations from their current high levels."

He said for the past few years "we have had a raucous party of economic growth fueled by an intoxicating brew of credit market practices" and added that the role of a central banker is to "take away the punchbowl just as the party gets going."

Fisher, who did not have a vote on the Fed's policy-making committee last year, said he was in favor of the Fed's rate cuts in 2007 but said he "did not feel it was the proper time to support" further rate cuts. He warned that the Fed now has to be cautious when considering more cuts.

The Fed has cut interest rates five times since last September, including a 75 basis point cut at an emergency meeting last month. (There are 100 basis points in a full percentage point.)

In the process, the federal funds rate, a key overnight lending rate that affects how much interest consumers pay on a variety of loans, has been lowered from 5.25% to 3%.

"Monetary policy acts with a lag," he said. "It takes time before you feel its full effect. The Fed has to be very careful now to add just the right amount of stimulus to the punchbowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in."

Fisher said "voracious" consumption of oil and other commodities in rapidly growing economies like China, India and Brazil are "putting upward pressure on prices in our economy."

His remarks echo those of Philadelphia Fed President, Charles Plosser, who said Wednesday that "we have to be particularly alert for rising inflation expectations."

Plosser's comments squelched a moderate rally on Wall Street Wednesday, as investors interpreted his speech as a sign that the Fed is less likely to cut interest rates further.

But stocks, which were trading modestly higher Thursday before Fisher's speech, added to their gains in mid-afternoon trading.