Fed wrestles with growth and inflation worries

By Steven C. Johnson

"Right now, we're concerned about growth," Richmond Federal Reserve Bank President Jeffrey Lacker told students and faculty at Marshall University's Lewis College of Business in Huntington, West Virginia.

Since September, the Fed has cut benchmark interest rates by 2.25 percentage points to 3 percent to help the economy weather a deep housing slump and a global credit crunch.

He did not forecast a recession but told reporters after his speech that "if something can tip us into recession, the housing market is the biggest risk."

Both men said slower growth does not mean the Fed can take its eye of the ball when it comes to inflation.

He said he expects core inflation, which strips out volatile food and energy costs, to remain above 2 percent, "which is above the range I consider to be consistent with price stability."

"We can't cut interest rates as aggressively in response to weakness in growth as we otherwise would," Lacker said. "We're going to be posed with some problems this year if inflation doesn't moderate the way we'd like to see it moderate."

FUTURE RATE CUTS

"We may cut interest rates again, we may not -- there's a lot of speculation about that," he said.

Federal Reserve Chairman Ben Bernanke is scheduled to testify before Congress on February 14 and is also expected to weigh in on the central bank's outlook

On Tuesday, data showing the worst monthly contraction in the services sector since the last U.S. recession sent the stock market down about 3 percent its biggest daily drop in nearly a year.

But he added that easier monetary policy would not by itself solve all the economy's problems.

He added that the bond insurers' problems "did not directly influence" the Fed's 1.25 percentage points of rate cuts delivered over an eight day span in January.

(Additional reporting by Mark Felsenthal in Huntington, West Virginia, and Verna Gates in Birmingham, Alabama; Editing by Neil Stempleman)