Fed's Lockhart: Fed actions should steady markets

By Karen Jacobs

ATLANTA (Reuters) - The Federal Reserve's recent interest rate cuts and injections of liquidity should help stabilize struggling housing and financial markets, and inflation should moderate later this year, Atlanta Fed President Dennis Lockhart said on Friday.

"The liquidity injections and easing of monetary policy should help housing and financial markets stabilize and avoid an 'adverse feedback loop' in which a decline in housing prices fuels financial market volatility with spillover to the broader economy," Lockhart said.

Speaking to the Southern Center for International Studies, Lockhart said the Fed's sharp rate cuts in January, which took benchmark short-term U.S. rates down to 3 percent from 4.25 percent, and additions of liquidity had helped address risks of economic weakening.

The Atlanta Fed chief said inflation has been higher than his personal comfort zone, but should moderate in the second half of the year.

Lockhart's comments suggested a range of views among Fed speakers this week on how much latitude the U.S. central bank has to cut rates further to thwart economic deceleration.

Dallas Fed President Richard Fisher said on Thursday the Fed must be careful with any rate cut tonic it applies because of the danger of igniting inflation from already high levels.

Lockhart warned inflation undermines economic growth and stressed that the Fed has to focus on price stability but added that as the economy softens, inflation is likely to ease.

"I would never say inflation is a good thing," he said in answering questions. "I think it's clear that the zone or the range of inflation that some of my colleagues feel is most comfortable, is safe, (is) between 1.5 percent and 2 percent, perhaps slightly higher, depending on how you measure," he said, adding that in the current economic environment, the Fed's latest rate cuts were appropriate.

"I felt comfortable supporting recent policy actions to lower rates because at that particular time it was appropriate to view the general economy as a priority," he said. "We are always running a risk, it's a very, very well-informed judgment but that is the trade-off as I saw it."

Lockhart described the recent deceleration of economic growth as "sharp" and noted that some analysts have seen a possibility of recession. However, he said his own outlook is for weakness in the first six months of 2008, followed by improvement in the final half of the year.