Fed's Lockhart: growth weak, inflation easing

By Alister Bull

ATLANTA (Reuters) - The global credit crisis will chill U.S. economic growth well into next year but powerful steps to unlock financial markets have been taken and will work, a top Federal Reserve official said on Monday.

"We at the Atlanta Fed expect weakness to persist for some time into 2009 as credit markets gradually improve," Atlanta Federal Reserve Bank President Dennis Lockhart told the Buckhead Rotary Club.

"The thawing of credit markets is a necessary condition for a recovery back to levels of growth consistent with the economy's underlying potential," he said.

Lockhart is not a voting member of the Fed's interest-rate setting committee this year.

The Fed has slashed interest rates and pumped more than $1 trillion into financial markets to prevent a credit crisis, sparked by massive losses on U.S. home loans, from inflicting a deep and damaging recession on the U.S. economy.

It cut key rates by a half percentage point to 1.5 percent earlier this month in an inter-meeting decision that was coordinated with other central banks in an unprecedented move.

"A broad set of policies have been devised and forceful actions taken to mitigate the effects of this credit contraction. I believe these policies will work," Lockhart said.

Traders have priced in a cut in the Fed's benchmark overnight funds rate by at least 25 basis points by the time of its next scheduled policy meeting, on October 28-29. Prices for interest rate futures indicate a roughly 50 percent likelihood that the Fed will cut by a half point.