Fed officials fret on growth, point to rate hold

By Ros Krasny

BLOOMINGTON, Illinois (Reuters) - Two top Federal Reserve officials on Friday voiced concern about weak U.S. economic growth for the rest of 2008 and said inflation, while a worry, should start to fade over time.

The comments by Chicago Federal Reserve Bank President Charles Evans and Atlanta Fed Bank President Dennis Lockhart suggested the Fed is in no hurry to start raising interest rates while the economy remains in a funk.

Lockhart even said he would not rule out cutting rates if circumstances warrant -- unusual at a time when Fed watchers almost uniformly expect the central bank's next move to be rate increase.

Evans said the current 2 percent federal funds rate was "not especially stimulative" to growth but further cuts might not help the most distressed parts of the market.

"The financial market turmoil has meant that our funds rate reductions have led to less credit expansion to households and businesses than would typically be the case," he said in a speech to the McLean County Chamber of Commerce in Bloomington, Illinois.

A WEAK SECOND HALF

Lockhart and Evans were united in forecasting weak second-half economic growth, especially as the impact of the federal stimulus package starts to fade.

"The second half of 2008 will likely be extremely sluggish," Evans said.

Growth will probably not return to a near-trend level of 2.5 percent to 3.0 percent, annualized, until 2010, he added.

Evans's comment echoed that made on Thursday by Minneapolis Fed President Gary Stern, who said it could be one to three years before the economy picks up a head of steam.

Stern is a voter on the policy-setting Federal Open Market Committee in 2008. Evans and Lockhart will both vote in 2009.

Lockhart also said economy in the second half could be "quite weak" with "risks to the downside."

Financial markets recently have pared back on ideas that the Fed will start raising benchmark interest rates soon to tamp down inflation.

Bets on a quarter-point increase to the 2-percent federal funds rate by year-end are running at about one chance in three.

INFLATION MODERATES?