(Recasts with more Fisher comments)
By Chris Baltimore
HOUSTON, Feb 9 (Reuters) - Dallas Federal Reserve Bank President Richard Fisher said on Monday that "a lot hangs" on the impact of the economic stimulus package being considered by the U.S. Congress and urged lawmakers crafting the plan not to compromise the independence of the nation's central bank.
With the U.S. Senate moving toward a vote on an $838 billion emergency package on Tuesday aimed at ending a year-long recession, Fisher said it's possible to see the U.S. economy contract by 2.5 percent in 2009, with a possible upturn in 2010.
Speaking at a high-profile energy conference, Fisher declined to discuss the specifics of the stimulus plan. But Fisher said it was "vitally important" not to compromise the ability of the U.S. central bank to address the problem.
"It is more important than ever that we maintain the independence of our central bank, keeping it free from being overridden by political considerations," Fisher said.
"I believe it vitally important that the Federal Reserve must be left alone to independently craft policies...to achieve financial stability and conduct monetary policy aimed at maximizing sustainable job creation without upsetting price stability," said Fisher.
Some economists warn that the Fed's credit support programs mix monetary policy with fiscal policy and could taint the central bank's independence in the future by creating winners and losers in the private sector.
Fisher is not a voting member of the Fed's policy-setting committee this year.
The Fed has lowered interest rates almost to zero and pumped hundreds of billions of dollars into financial markets to prevent them freezing in panic over bank losses from the collapse of U.S house prices and the recession.
Policy-makers voted on Jan. 28 to use all available tools to ease credit market conditions, including supporting the market for consumer and small business loans, as well as considering purchases of long-dated Treasury securities.
Fisher warned this option has risks, but they ought not stop the Fed from taking this course of action if it looks like the right choice.
"The Federal Reserve must, of course, be very careful to avoid the perception that it is monetizing the explosion of fiscal deficits, as this would undermine confidence in our independence and raise serious doubts about our long-term commitment to price stability.
"This does not mean, however, that we should refrain from buying Treasuries in this time of crisis," Fisher said.
He also noted that the Fed was well aware that the issuance of new Treasuries was expanding at an "eye-popping pace" to pay for the surging U.S. budget deficit, as the government tackles the housing market collapse and ensuing recession.
Some analysts argue that the Fed might want to reduce the scale of a credit support program in order to lower the size of the U.S. monetary base to fight inflation, but find its ability to act hampered by the political desire to keep the program in place.
Fisher stressed the need to keep politicians at bay.
"In times of economic duress, there is always a temptation for political authorities to compromise the central bank," he said.
The Fed has already launched a program to buy mortgage-backed securities, support the market for top-rated issuers of commercial paper, and provide a liquidity backstop to money market mutual funds. These unconventional monetary policy measures have helped to more than double the size of the Fed's balance sheet to around $2 trillion.
Fed action to boost liquidity is aimed at preventing a severe recession from turning into a prolonged slump, with Fed interest rates already about as low as they can go. The Fed hopes that credit easing will make it easier for Americans to borrow and spend, which in turn will stimulate the economy. (Writing by Alister Bull; Editing by Leslie Adler & Kazunori Takada)