Fed's Plosser: Market woes warrant low rates

By Alister Bull

WASHINGTON (Reuters) - U.S. financial turmoil is serious enough for the Federal Reserve to lower interest rates, but the central bank should be ready to raise rates when conditions stabilize, Philadelphia Federal Reserve Bank President Charles Plosser said on Monday.

"The severity of events affecting the smooth functioning of financial markets suggests that rates, perhaps, should be somewhat lower than simple rules might suggest," Plosser said in remarks to the National Association for Business Economics.

"Departures from the more systematic elements of making policy decisions must be relatively transitory and reversed in due course if we are to keep expectations of future inflation well-anchored," he said.

The Fed has slashed interest rates by 2.25 percentage points since mid-September to shield the economy from a collapse in the housing market, which has chilled growth and sparked a global tightening in credit conditions.

This muscular response and doubts over the U.S. economic outlook have contributed to a sharp decline in the dollar, which touched a fresh low against a basket of major currencies on Monday.

Plosser said it was very difficult to forecast exchange rates with any accuracy, but acknowledged the U.S. current account deficit might be weighing on the currency.

"A lot of people have been predicting for a long time that given the size of our current account deficit, that there was going to be continued pressure on exchange rates to adjust to help eliminate that," Plosser said.

"Indeed, that is partly what has happened. That process will no doubt continue," he added.