Speaking at an inflation conference at the Boston Federal Reserve, Richard Fisher of the Dallas Fed said he was not advocating an increase in interest rates even though he "drew the line" when the Fed funds target was at 3.50%.
The financial turmoil was not a "storm", but a "spring shower" said Fisher, warning that the greatest vulnerabilities of the U.S. economy were unfunded liabilities such as Medicare.
The central banker also voiced his support for inflation fighting, saying that he would accept slow economic growth in favour of stable prices. The Fed, "cannot allow inflation to take grip," said Fisher, citing an emergence of new inflation pressures.
The Fed is torn by its dual mandate of employment and price stability, said Fisher, adding that he would prefer a single obligation to delivering price stability, a model similar to the European Central Bank. He also said he understood and supported ECB President Jean-Claude Trichet's signal for higher interest rates at the bank's meeting last week.
Fisher also said that a weakness in the USD could add to inflation pressures.
Fisher also noted that credit markets were in better shape now, praising Fed Chairman Ben Bernanke for having been ahead of the markets in recognizing a rise in demand for liquidity. He also noted that the adjustment process could be a painful one, citing the collapse of Bear Stearns.
He also said that there was moral hazard associated with the Fed intervening in the markets and said he did not want to encourage such actions.
By Erik Kevin Franco and edited by Cristina Markham