NY Fed chief says low rates needed for some time

NEW YORK (Reuters) - The U.S. central bank may need to keep interest rates low for some time if extreme stresses in financial markets persist, threatening the economy, New York Federal Reserve President Timothy Geithner said.

Geithner, in remarks prepared for the Council on Foreign Relations, said the credit crisis heightened the downside risks to an already wobbly outlook for economic growth.

"The U.S. economic and financial system is undergoing a very challenging period of adjustment, and we are likely to be living with a high degree of uncertainty for some period of time," he said.

"If turbulent financial conditions and the associated downside risks to growth persist, monetary policy may have to remain accommodative for some time."

The Fed has cut interest rates sharply over the past six months, bringing them down to 3 percent from 5.25 percent in September.

Fed Chairman Ben Bernanke suggested last week the central bank would reduce rates further to support the economy. Markets expect at least another half percentage point cut this month.

But Geithner also acknowledged that underlying inflation has been higher than expected.

Commodity prices have surged in recent months, with oil setting new records above $105 a barrel and gold nearing $1,000 an ounce, and Geithner said still strong global growth may prevent these prices from moderating in the near-term.

He said dealing with downside growth risks and rising inflation "requires a fine balance" but added that "if the medium-term outlook for inflation deteriorates significantly, the Federal Open Market Committee will move with appropriate speed and force to address this risk."

HOUSING MARKET AT RISK, BUT STIMULUS WILL HELP

Geithner said the "substantial impairment" of the securitization market has made it harder for banks to raise money and said financial conditions on the whole have tightened further despite the Fed's aggressive easing to date.

That raises risks for the broader economic outlook, he said, pointing in particular to the potential it has for worsening an already deep slump in the U.S housing sector.

He encouraged targeted support for housing to prevent further price declines and added that a fiscal stimulus package signed into law by Congress recently "will provide a meaningful level of support" that could add up to 1.5 percentage points to growth over the next few quarters.

(Reporting by Pedro Nicolaci da Costa, Editing by Chizu Nomiyama)