WRAPUP 3-Fed's Lockhart says bar high to further easing

* Lockhart won't rule out more easing but says bar is high

* Officials see growth picking up in second half

* Bullard worried about large balance sheet

* Fed policy currently highly accommodative
(Adds comments, byline)

By Mark Felsenthal and Pedro da Costa

WASHINGTON, July 29 (Reuters) - The U.S. economy should
pick up steam in the second half of the year despite a dismal
performance in recent months, allowing the Federal Reserve to
keep policy on hold for now, two top Fed officials said.

Against the backdrop of a congressional crisis over U.S.
debt, both officials expressed a strong reluctance to take
additional monetary easing steps, though they both agreed no
options should be taken off the table.

Data on Friday showed the economy expanded a paltry 1.3
percent in the second quarter. Even worse, the first quarter's
reading was revised down sharply to an annualized 0.4 percent
-- dangerously close to contraction.

Growth may have been damaged in July by continued
uncertainty over the debt limit, which is risking the prospect
of a once-unthinkable U.S. ratings downgrade.

Saying he had not given up hope for a stronger second half
following dismal growth data for the first and second quarters
published on Friday, Atlanta Fed President Dennis Lockhart said
he was in a wait-and-see mode with regards to policy.

"While at present I do not see much risk of another
outright recession, I don't think we can dismiss the
possibility that we're in a persistent slow-growth recovery,"
Lockhart told the Third Annual Rocky Mountain Economic Summit.

If growth picks up as he expects, Lockhart said, then the
Fed would begin unwinding its extraordinary monetary support to
the financial system late next year.

"If, however, I come to conclude that we're in a world that
portends a long period of very weak growth, high unemployment,
and painful structural adjustment, the much-anticipated policy
normalization may have to be rethought."

Lockhart's counterpart at the St. Louis Fed, James Bullard,
said he was worried about the inflation risks posed by the
Fed's large balance sheet, which was expanded sharply to a
record $2.8 trillion in response to the financial crisis.

The Fed cannot buy Treasury debt directly and would not be
able to intervene to prevent a default, Bullard said.

"If it led to a generalized crisis we can come in and
provide liquidity to markets as we did in 2008 and 2009," he
said. "But the Fed doesn't have any ability to fix this
situation."

Bullard is viewed as a centrist and Lockhart is seen as
somewhat more of a growth-focused dove along the spectrum of
Fed officials' views. The next meeting of the Fed's
policy-setting Federal Open Market Committee is scheduled for
Aug. 9, but neither official is a voting member of the panel.

The U.S. central bank in June ended a second round of
quantitative easing and indicated it will watch developments in
the economy for a while before taking any further steps.

Since the Fed has already cut interest rates to near zero
and bought a cumulative $2.3 trillion in assets over two
installments to boost growth, the central bank's choices are
limited if it decides more stimulus is necessary.

Some analysts believe the Fed would be most likely to
bolster its promise to maintain a large balance sheet or a long
period of very low rates.

Bullard and Lockhart said that headwinds facing the economy
in the first half of the year are already beginning to moderate
and should allow the economy to grow more quickly.

"I think we're in better shape for better growth in the
second half of the year," Bullard said.
(Editing by Chizu Nomiyama and Kenneth Barry)