Fed's Lockhart: open minded on need for more cuts

By Alister Bull

MURFREESBORO, Tennessee (Reuters) - Atlanta Federal Reserve Bank President Dennis Lockhart said on Friday that market turmoil could hinder the U.S. economy and he had an "open mind" on the need for further interest rate cuts.

"My intention is to signal neither that we're through, that what we've done is enough, nor that we're, in my view... definitely headed toward further cuts," he told reporters after delivering a speech here.

"My intention was very much to signal neutrality on that question, and where I come out on that question will depend upon the spectrum of indicators and inputs that we get."

The Fed cut the overnight federal funds rate target by a half-percentage point to 4.75 percent on September 18 to shield the economy from the slumping housing sector. It also noted that the economic outlook had become less certain.

Lockhart said the cut had improved psychology and although risks remained, he struck a measured tone in his speech about the dangers facing U.S. growth.

"I believe the current Fed policy abets a flight path of lower but still positive growth and moderate inflation. More turbulence may be ahead. So keep your seatbelts fastened," he said during a speech at Middle Tennessee State University.

Interest rate futures imply a very high likelihood the Fed will cut another quarter point from its target rate at its next scheduled meeting, on October 30-31.

Economists are divided on whether the Fed's move was warranted by the drag on growth from the housing sector and if it could unleash inflation further down the road.

Lockhart, who is not a voting member of the Fed's interest-rate setting committee this year, said the U.S. central bank would be watching developments in the outlook for inflation, but stressed he felt it remained under control.

"Currently, I believe long-term inflation expectations remain anchored, and measures of current inflation have decelerated during the year from elevated levels in 2006."

"While inflation is currently at the upper bounds of my comfort zone, the Fed has made progress against it. That's why I believe the recent moderation of inflation readings allowed a tactical move to reduce risks to the general economy with a fed funds cut," he said.

He also played down the widening in TIPS (Treasury inflation protected Securities) and the steepening in the yield curve witnessed since the rate cut, which some economists say signals an increase in inflation premiums in the bond market.

"I take the TIPS spreads, or the steepening of the yield curve, as an indicator of market sentiment... I take it into consideration to determine what expectations are, but I don't think any single indicator is definitive," he said.

On the other hand, Lockhart made pretty plain that he felt market turmoil and slowing housing had shifted the balance of risks away from inflation and toward weaker growth.

"I believed, and still do, that the factor weighing most heavily on this change in the outlook has been the potential negative ramifications of the financial turmoil," he said.