Fed official sees recent moves steadying markets

ATLANTA (Reuters) - Recent action by the Federal Reserve is likely to calm troubled U.S. markets, but inflation remains a worry, a top U.S. central bank official 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," Atlanta Fed Bank President Dennis Lockhart said.

Speaking separately in Cleveland on Friday, Cleveland Fed President Sandra Pianalto acknowledged in a speech on housing that "we are going through some very difficult times right now," but did not comment on the outlook for the economy or Fed policy.

RANGE OF VIEWS

Lockhart told the Southern Center for International Studies 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 to growth in the U.S. economy.

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 add to 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. Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Charles Plosser echoed concerns about high inflation.

"We can't cut interest rates as aggressively in response to weakness in growth as we otherwise would," Lacker said on Thursday.

And San Francisco Fed President Janet Yellen late on Thursday indicated a willingness to cut rates further, adding she is not confident a recession can be avoided this year.

The Fed's policy-setting committee is not due to meet again until March 18, and financial markets anticipate another rate cut of between a half-percentage point and three-quarters of a point.

Fisher, Plosser, and Pianalto are voters on the panel, while Lockhart and Yellen are not.

ECONOMY A PRIORITY

Lockhart warned inflation undermines economic growth and stressed the Fed has to focus on price stability, but 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.

(Reporting by Karen Jacobs, writing by Mark Felsenthal; Editing by Neil Stempleman)