Fed's Lacker sees slow growth, inflation a worry

CHARLOTTE, North Carolina (Reuters) - The U.S. economy will be "very weak" for several more months and manage modest growth in 2008, but inflation is a worry and spells for tough monetary policy decisions next year, a top Federal Reserve official said on Wednesday.

"I have to say that I am uncomfortable with the inflation picture, and disappointed that the improvement we saw earlier this year was not more lasting," Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, told the Charlotte Chamber of Commerce.

"I am also troubled by the lengthy divergence we've seen between overall and core inflation," Lacker said.

"Because the job of a central banker is to protect the purchasing power of currency, it is overall inflation that we need to keep down, not just core inflation. ... If energy prices fail to decline, monetary policy decisions will be that much more difficult in 2008," he said.

The U.S. central bank has slashed its key interest rates by a full percentage point since mid-September in response to a credit crunch spurred by the slumping U.S. housing market.

But concerns over inflation due to rising food and energy prices may curb its ability to keep lowering rates in the months ahead, although Lacker acknowledged growth would slip.

"I expect growth to be very weak for several more months, but to improve as we move through 2008. So if I had to guess ... I would write down that real GDP (gross domestic product) growth will be between 2 and 2-1/4 percent from the fourth quarter of 2007 to the fourth quarter of 2008," said Lacker.

"While I would agree that the most cogent risks to the growth outlook are on the downside. ... I believe the most likely outcome is for growth to continue and to improve over the course of next year," he said.

Answering questions, he added: "I expect growth to pick up toward trend in 2009."

(Editing by Andrea Ricci)