April 4 (Bloomberg) -- Federal Reserve Bank of Dallas President Richard Fisher said damage from the U.S. subprime mortgage market is mostly contained and central bankers are trying to ``tread very carefully'' in response.

``Regulatory agencies are working hard to avoid causing an overreaction with credit standards that would needlessly cause too much of a slowdown in housing or the overall economy,'' Fisher said in a speech today to the Austin Mortgage Bankers Association in Texas.

While the housing industry will likely hold down growth, consumer spending continues to sustain the economy, he said. The central bank's job isn't to bail out particular industries, Fisher added. He said he's ``very happy'' with the Fed's stance of leaving interest rates unchanged while keeping inflation as its main concern.

``The damage from the subprime market has been largely contained,'' Fisher said. ``Fortunately, the financial system and the economy are strong enough to weather this storm.''

Speaking with reporters after the speech, Fisher said he was ``hopeful'' that inflation will moderate. It remains ``too high,'' he added.

The Fed's preferred inflation benchmark, the personal consumption expenditures price index minus food and energy, has been at or above the top of the comfort zone articulated by at least six Fed officials for almost three years. It rose 2.4 percent for the year in February.

Fed Statement

The Federal Open Market Committee voted unanimously on March 21 to keep the overnight lending rate between banks at 5.25 percent, the level it's been at since June. The Fed dropped reference to the chance of ``additional firming'' in rates, while stating that inflation was the ``predominant concern.'' The next meeting is on May 9.

``I'm very happy with where we are and I'm very happy with the way the statement stated what we discussed,'' Fisher said. By comparison, St. Louis Fed President William Poole, said earlier this week that the March 21 statement wasn't entirely successful because economists had differing interpretations.

Fisher said that subprime problems are limited in part because many mortgages were packaged into bonds, helping diffuse the risk across different investors. The subprime malaise is mostly in the adjustable-rate segment, which accounts for 8.5 percent of outstanding mortgage debt, he added.

Delinquent Borrowers

Delinquencies on mortgages to subprime borrowers with limited or weak credit rose to 13.3 percent in the fourth quarter, a 3 1/2-year high. Congress is considering regulations to tighten lending standards, and lawmakers have criticized the Fed and other regulators in recent weeks for allowing too many borrowers to get mortgages they couldn't afford to repay.

``By always bearing in mind the potential for policy makers to compound rather than solve problems, the Fed and other regulators are doing their level best to tread very carefully in dealing with the subprime situation,'' Fisher said.

The U.S. economy grew at an annualized pace of 2.5 percent in the fourth quarter, the Commerce Department said last week in providing its third estimate. Growth, hobbled by slumps in home building and in corporate spending that show few signs of abating, was initially calculated at 3.5 percent for the period.

``The economy will grow somewhat more slowly because of the correction in the housing market,'' Fisher said. ``Other pistons in our economic engine, particularly consumption, continue pumping.'' Consumer spending added 2.9 percentage points to growth last quarter.

No Action

Fisher suggested that the Fed wouldn't act to halt a decline in property values.

``Our job in this regard is to be very careful that any meltdown in any sector does not infect the entire system,'' Fisher said in response to a question. ``I don't think we should be in the business of focusing on any one asset class. I don't think we should be in the business of making markets happy. If we do our job, then the markets will be happy.''

The former money manager said ``the subprime situation may well be a blessing in disguise'' because it may prompt lenders to discipline their practices. He said he expected the market to swiftly punish ``those who pressed the limits of imprudence or suffered selective amnesia.''

Fisher, 58, does not vote on interest rates this year. A former deputy U.S. trade representative and Democratic candidate for the Senate, he joined the Dallas Fed bank as its president two years ago today.

To contact the reporters on this story: Vivien Lou Chen in Austin at vchen1@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net

Last Updated: April 4, 2007 15:10 EDT