Dallas Fed President Richard Fisher said unemployment may exceed 8% next year as he expects the U.S. economy to contract through to June 2009.
Speaking in Dallas, Fisher said that U.S. GDP will shrink 4% to 5% in the fourth quarter and believes it will continue to contract into early 2009.
"Unemployment has increased to 6.7 percent at the last reading and appears to me to be headed in the direction of, and possibly past, 8 percent," he added.
Fisher added that the Fed will not shy away from using every practicable means necessary to help the economy and aid in the proper functioning of markets.
The Dallas Fed president also said that the Fed is taking a qualitative approach to quantitative easing by boosting the asset side of the Fed's balance sheet.
He acknowledged that some Fed action has gained some traction, citing lower Libor rates. However, he warned that there is still a long way to go.
"Some of our innovative contraptions have begun to work. For example, the London interbank offered rate, known by its acronym LIBOR, has come down handsomely," Fisher said.
In a question and answer session, Fisher said the Fed will eventually have to tighten rates and shrink its balance sheet. He also warned about the risk of deflation taking hold in the economy. "We have to prevent deflation from taking grip," he said.
Asked about the Fed intervention in the markets, Fisher commented that the central bank is "well aware" that it needs an "exit strategy".
Fisher also said that it will take some time to restore confidence to markets after all the damage that has been done over the past few months. He noted there are some signs emerging that confidence is returning to markets, but there is still a long way to go.
Fisher is technically an FOMC voting member until the next Fed meeting on Jan. 28.
By Steve Stecyk and edited by Nancy Girgis
©CEP News Ltd. 2008