Fed's Fisher: Will take every step to fight deflation

Richard Fisher, president of the Federal Reserve Bank of Dallas, delivers the 2009 Albert H. Gordon Lecture about the current financial crisis at the John F. Kennedy School of Government at Harvard University, February 23, 2009.

SMITHFIELD, Rhode Island (Reuters) - U.S. central bankers will pay special attention to ensure the economy is not strangled by a persistent decline in prices, or deflation, a top Federal Reserve official said on Tuesday.

"Deflation is as dangerous as inflation, and we will take every step to counteract it," Richard Fisher, president of the Federal Reserve Bank of Dallas, told reporters after a speech at Bryant University in Smithfield, Rhode Island.

As companies across the country cut jobs and consumers spend less, many economists are worried about the potential for a sustained decline in prices.

The Dallas Fed calculates price pressures based on personal consumption expenditures, or PCE, and in the bank's December report, the bank found that more than 50 percent of the market basket was going down in price, Fisher said.

But Fisher cautioned it was far from certain whether this decline will continue in coming months.

"There are price pressures on the downside, but we will make sure that deflation does not take hold," Fisher said.

At the same time, Fisher said U.S. central bankers are keeping a watchful eye on inflation. Some economists have voiced concern about the potential for inflation down the road as the Fed has cut interest rates to near zero and pumped hundreds of billions of dollars into the financial system to unfreeze key credit markets.

The most recent data show that the Consumer Price Index, the most commonly used measure of inflation, was up 0.3 percent on the month.

As growth slows and U.S. financial markets sink further -- the two main U.S. stock indices hit their lowest levels in 12 years on Monday -- Fisher said confidence is hit further by news that investment advisers like Bernard Madoff and Allen Stanford may have cheated their investors.

While side-stepping thorny issues about whether the U.S. government should or may take a greater ownership stake in some of the country's biggest banks, Fisher said it was important for government aid, if needed, to be as short in duration as possible.

At the same time, he warned that America's long-term entrepreneurial spirit could be choked off if salaries and incentives are capped severely. Recently. proposals have been floated to cap salaries for top employees at some financial companies that receive aid from the government.

Fisher also said it will be tough to overhaul the nation's regulatory system in the wake of failures that included regulators' initially missing the Madoff case and overly aggressive lending to homeowners.

"It will be simplified," Fisher said of the regulatory system. "The problem with Washington is that nobody wants to give up authority and this will be a tough negotiation," he added, noting, "It ought to come out simpler and more productive than it is now."

But he also warned that regulation must not stifle innovation. "You can't contain human initiative, but that doesn't mean you shouldn't be able to guide it somewhat," he said.

(Aditional reporting by Kristina Cooke in New York; Editing by Chizu Nomiyama)