Fed policy-maker warns U.S. near recession

By Burton Frierson

CHATTANOOGA, Tenn (Reuters) - The U.S. economy could be slipping into recession and the Federal Reserve must cushion the pain, a top Fed policy-maker said on Thursday in remarks supporting hopes for more interest rate cuts.

Dennis Lockhart, president of the Atlanta Fed, was one of a number of central bankers on the luncheon speaking circuit hours after government data confirmed anemic growth in the fourth quarter, which analysts say has since slowed further.

"It's clear the economy is in a slowdown that resembles past periods that were the leading edge of a recession," Lockhart told a Rotary Club meeting. "I believe that an important policy objective at this juncture is to ensure that this slowdown is short and shallow."

The Fed last week slashed benchmark lending rates by a hefty three-quarters of a percentage point to a three-year low of 2.25 percent, in addition to the other measures it has introduced to keep money flowing in markets. Investors think it will trim rates by another 50 basis points at its next scheduled policy meeting, on April 29-30.

Meanwhile, Cleveland Fed Bank President Sandra Pianalto said a mortgage crisis that is pulling down housing prices is casting a pall over consumer spending and is "very detrimental to our economy."

Much of her address in Dayton, Ohio, dealt with the Fed's effort to put new policies in place to try to mitigate the damage from the ongoing credit crisis to a vulnerable economy.

Pianalto is a voting member of U.S. central bank's policy-setting Federal Open Market committee this year, but Lockhart is not. The Fed's regional bank presidents get voting slots on a rotating basis.

Gary Stern, president of the Minneapolis Fed and a voting member this year, also voiced concern over slow growth.

"People should be under no illusions that even if policy is reasonably effective and reasonably timely, that given the disruptions we have had with the financial sector and implications for the outlook ... some of this (weakness) is now baked in the cake," he told a seminar in London.

Stern and Pianalto both voted for the Fed's last rate cut. But two other regional Fed presidents -- Dallas Fed chief Richard Fisher and Philadelphia's Charles Plosser -- voted against such a large move. Plosser speaks Friday in Cape Town.

CASH LIFELINE

The Fed has pumped hundreds of billions of dollars of liquidity into strained markets and allowed investment banks access to its credit facilities -- the first time since the Great Depression that it has permitted non-banks to go to its discount window for cheap loans.

"All of these innovations are designed to bolster market liquidity and promote orderly market functioning," Pianalto said. "Liquid, well-functioning markets are essential for promoting financial stability and economic growth."

There was not much growth in the fourth quarter, the Commerce Department confirmed on Thursday as it reported gross domestic product grew at a scant 0.6 percent annual rate after expanding at a 4.9 percent clip in the third quarter. Corporate profits shrank as the year ended, and growth is widely seen as having slowed or stopped this year.

Pianalto defended the Fed's decision to directly fund JPMorgan Chase's deal to buy ailing investment bank Bear Stearns , saying turbulent times call for extraordinary measures.

A fourth central bank policy-maker, Fed Governor Randall Kroszner, avoided direct comment on the economy during an address to a Washington real estate group, but did pledge the Fed will tighten up the rules on future lending.

Loose practices, like failing to verify a mortgage borrower's income or employment, are widely blamed for having permitted people who lacked the ability to repay to get subprime mortgages that now are defaulting in droves.

Kroszner said the Fed favors changes that would "prohibit a lender from engaging in a patter or practice of making higher-priced loans based on the value of the borrower's house rather than on the borrower's ability to repay from income."

(Additional reporting by Ros Krasny in Dayton, Ohio; David Lawder and Alister Bull in Washington; Pedro Dacosta in New York; Jamie McGeever and Veronica Brown in London. Writing by Glenn Somerville; Editing by Dan Grebler)

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