US Federal Reserve Bank of Dallas President Richard Fisher said “grim” figures indicate the world’s largest economy shrank steeply last quarter.

The bank president’s remarks come as US policy makers continue an unprecedented campaign to increase the money supplied to the economy. Fisher, 60, is among the most hawkish members of the Federal Open Market Committee (FOMC), having voted five times last year in favor of tighter policy.

The central bank’s policies are likely to help end the US recession, Fisher said in the speech at a luncheon sponsored by the Asian Society of Hong Kong. Government stimulus measures should also start to have an impact on the world’s largest economy from the second quarter, he said later in an interview with Bloomberg Television.

The US economy shrank at an annual 6.3 percent pace in the final three months of 2008, the worst performance since 1982. A report later this month will show gross domestic product fell an annualized 5 percent last quarter, according to the median estimate of 74 economists surveyed by Bloomberg News.

Rising unemployment

Minutes of the Fed’s most recent meeting in March show that policy makers feared the US economy might fall into a self-reinforcing cycle of rising unemployment and slumping business and consumer spending. That outlook prompted the FOMC to boost its open-market purchases of bonds by $1.15 trillion.

Fisher’s forecast for unemployment to exceed 10 percent goes beyond the expectations of any other Fed official. The jobless rate reached 8.5 percent in March, the highest since 1983.

Fisher also told the gathering that the US and China depend on each other for economic prosperity.

“We have never been bought into the theory of decoupling; it’s nonsense,” he said in response to a question after the speech. “China cannot succeed unless the US succeeds, and the US needs China to succeed as well.”

Fisher said China would be a “force of stability” within Asia as long as the economy keeps expanding. “Growing domestic consumption and imports would be helpful” for Asia’s second-largest economy, he said.

China’s treasury buying

There’s no reason why China would reduce its purchases of US Treasuries, which have “obviously been a plus for the US” by containing interest rates, Fisher said. “I don’t detect any desire among the Chinese government that they will not help us,” he said.

Chinese Premier Wen Jiabao said on March 13 that he was “worried” about the safety of the nation’s holdings and called on the US “to guarantee the safety of China’s assets.” China is the world’s biggest purchaser of Treasuries, with holdings at about $740 billion, according to US data.

On Monday, the Fed bought $7.37 billion of Treasuries maturing between two and three years as part of the central bank’s efforts to reduce lending rates and lift the economy out of recession.

Fisher said the world should adjust to US consumers saving more and spending less. While the likelihood of a collapse in US retail sales is diminishing, it is too early to say they have reached bottom, he said.

The Dallas regional chief said he would welcome “slightly positive” inflation in figures due this week. The consumer price index probably rose 0.1 percent March from February, when it climbed 0.4 percent, according to economists surveyed.

Fisher, who does not vote on rates this year, was the first of four US central bank officials speaking Tuesday. The committee’s next scheduled meeting is on April 28-29 in Washington.

Source: Bloomberg