Nov. 5 (Bloomberg) -- Federal Reserve Governor Frederic Mishkin said last week's interest-rate cut was aimed at reducing economic risks and policy makers can take back the move should it prove ``unnecessary.''

Fed officials ``perhaps could have waited for more clarity and left policy unchanged last week, but I believe that the potential costs of inaction outweighed the benefits,'' Mishkin said at a conference in New York. ``Should the easing eventually appear to have been unnecessary, it could be removed.''

Mishkin, in the first comments by a policy maker since the Federal Open Market Committee lowered the benchmark interest rate a quarter-point to 4.5 percent, said the easing won't ``materially'' change the inflation outlook. Still, he reiterated language from the Oct. 31 statement that rising energy and commodity prices may spur broader inflation.

``With an unchanged policy interest rate, I saw downside risks to the outlook for growth,'' especially from ``still- fragile'' financial markets, Mishkin said at the Risk USA conference on derivatives and risk management. ``My vote to ease policy at the meeting was motivated by my wish to reduce those risks.''

Mishkin's defense comes amid the first public split on the FOMC since December. Last week's vote was 9-1, with Kansas City Fed President Thomas Hoenig preferring to leave the overnight lending rate between banks unchanged. Hoenig speaks on Nov. 15, while Chairman Ben S. Bernanke will discuss the economic outlook Nov. 8 in testimony before Congress's Joint Economic Committee.

Fed Actions

Central bank policy makers have now lowered their benchmark rate by 0.75 percentage point and the charge for direct loans to banks by 1.25 percentage point since access to credit slumped in April. The New York Fed has also injected reserves into money markets to help provide liquidity.

The reductions in the federal funds rate ``reduced significantly the downside risks to growth so that those risks are now balanced by the upside risks to inflation,'' said Mishkin, whose academic background and past collaboration with Bernanke makes him an influential official, economists say.

Traders are betting that the Fed isn't done lowering borrowing costs. They see about a two-thirds chance of another quarter-point rate cut at the next FOMC meeting on Dec. 11, based on futures prices.

Throughout the speech, Mishkin laid out what he called a ``framework'' for understanding the Fed's decisions to cut rates in September and October.

`Not' a Bail-Out

``The Federal Reserve has a clear interest in promoting the stability of financial markets'' to foster economic growth, said Mishkin, 56, who joined the Fed board in September 2006 and has studied central banking and topics such as financial crises for three decades. ``Policies to achieve this goal are designed to help Main Street and not to bail out Wall Street.''

He warned of an ``adverse feedback loop'' in which ``financial disruptions cause investment and consumer spending to decline, which, in turn, causes economic activity to contract.''

In times of instability, the Fed's rate decisions must be ``timely, decisive and flexible'' to prevent market turmoil from threatening its main objectives, Mishkin said.

``Waiting too long to ease policy in such a situation would only risk a further deterioration in macroeconomic conditions and thus would arguably only increase the amount of easing that would eventually be needed.''

Commercial-Paper Fund

Asked about last month's agreement among Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. to set up a fund to increase liquidity in asset-backed commercial paper, Mishkin said the ``details'' are ``not clear to me.''

If the so-called super-structured-investment-vehicle proves to increase information available to investors, that would aid financial markets, he said. Mishkin said in his speech that investors are still struggling to establish prices of complex securities in the wake of the credit collapse.

Other Fed officials may provide their views this week on the rate cut. Later today, Fed Governor Randall Kroszner gives two speeches in the Washington area on mortgage lending. On Nov. 7, Richmond Fed President Jeffrey Lacker, who dissented four times last year in favor of higher rates, speaks in New York.

Fed Governor Kevin Warsh, Atlanta Fed President Dennis Lockhart and William Poole, chief of the St. Louis Fed, also speak on Nov. 7.

Growth Pace

Mishkin said the Fed must be ready to reverse course and raise rates to combat inflation. The U.S. economy expanded at almost a 4 percent annual pace in the second and third quarters, while record crude-oil prices are sparking inflation concern.

He also said, in answering a question, that the Fed must account for the effects of a weaker dollar when considering inflation.

Inflation can remain under control in face of shocks if expectations for prices stay contained, Mishkin said. He added that inflation expectations haven't risen since the rate cuts, and that it's ``remarkable'' how well-anchored they are.

Third-quarter growth figures, released last week by the Commerce Department, indicated ``considerable underlying strength in spending before the recent financial turbulence,'' he said. Mishkin said afterward that the lack of spillover from housing into the broader economy ``bodes well.''

``Flexibility is also an important characteristic of monetary policy during a time of financial turmoil,'' Mishkin said. ``If, in their quest to reduce macroeconomic risk, policy makers overshoot and ease policy too much, they need to be willing to expeditiously remove at least part of that ease before inflationary pressures become a threat.''

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Anthony Massucci in New York at amassucc@bloomberg.net.

Last Updated: November 5, 2007 10:35 EST