Hawks won't halt Fed rate cuts but may temper scope

By Alister Bull

WASHINGTON (Reuters) - Federal Reserve hawks will not prevent more interest rate cuts designed to bolster the U.S. economy, but they may temper the depth of future policy easing and help keep inflation expectations contained.

Two dissenting votes on Tuesday against the Fed's cut of three-quarters of a percentage point in the overnight interbank federal funds rate to 2.25 percent marked the first time since September 2002 that a pair of policy-makers defied their Fed colleagues.

"This is positive. It shows people that this is not just a rubber-stamp Fed that follows the chairman," said former Cleveland Federal Reserve Bank President Lee Hoskins.

"Dissents are important, both inside the Fed and as a signal to markets," said Hoskins, arguing it was crucial that the Fed not water down its goal for price stability as it fought financial market stress sparked by the subprime crisis.

The hold-outs against the 75 basis point cut by voting members of the Federal Open Market Committee were Dallas Fed President Richard Fisher and Philadelphia Fed chief Charles Plosser. Both argued for less aggressive policy action.

Plosser is an academic economist of international standing and Fisher a successful hedge fund manager and former U.S. trade representative. Both recently voiced concern about rising inflation, and Fisher had dissented against the Fed's last rate reduction on January 30 as well.

"It seems as if the (FOMC) wanted to regain some inflation credibility after focusing on the financial sector and the economy of late," said Harm Bandholz at UniCredit Markets and Investment Banking.

In addition, only three of the 12 regional Fed branches were immediately on board with the accompanying three-quarter point cut in the discount rate charged on direct central bank loans to financial firms, although five others quickly joined the ranks.