Federal Reserve officials sounded a relatively upbeat note on the U.S. economy on Wednesday, but warned timing withdrawal of the bank's extraordinary support for the economy will prove difficult.

Richmond Federal Reserve Bank President Jeffrey Lacker told a conference in Charlotte, North Carolina that U.S. central bankers should not let pockets of economic weakness distract them from fighting inflation as growth recovers.

Lacker said a worldwide pick-up in economic activity was boosting demand for U.S. exports, while housing and autos were no longer a drag on growth. That said, employment and commercial real estate continue to present serious hurdles, he cautioned.

These conflicting trends will make it difficult for the Fed to correctly time an eventual pullout from unprecedented emergency measures, including record low interest rates and over $1 trillion of credit pumped into the financial system.

I will be looking for the time at which economic growth is strong enough and well-established enough, even if it is not yet especially vigorous, he said. We cannot be paralyzed by patches of lingering weakness.

ROUGH TIME FOR FED

The Federal Reserve cut interest rates to near zero last December and put in place a number of emergency programs. This year, it began buying $1.25 trillion in mortgage-backed securities, agency debt, and longer-term Treasury securities in order to further stimulate economic growth.

James Bullard, president of the St. Louis Fed, told CNBC he thought the economy would grow more strongly in the fourth quarter than in the third, when gross domestic product expanded at a 2.8 percent annual rate.

Bullard said the policy-setting Federal Open Market Committee is determined to keep inflation low, but cautioned that it is a rough time for monetary policy.

A senior official at the New York Fed, speaking at a dinner in New York, said the Fed is developing exit strategy tools, including two cash draining instruments.

But, said Brian Sack, head of the key regional Fed bank's markets group, building the tools is only half the battle. Determining how to use them properly will be at least as challenging.

The central bankers' comments come as global central banks face opposing forces that pull them in different directions. Australia raised rates for a third time this week, while Japan announced measures aimed at further easing lending conditions.

The European Central Bank, for its part, is expected to outline a sketch of its own exit strategy at a meeting on Thursday.

INFLATION RISK

With the U.S. economy expected to rebound slowly, many analysts believe the Fed will be one of last central banks to unwind liquidity efforts.

The Labor Department will release the latest employment figures on Friday. They are forecast to show another 140,000 jobs were lost in November, while the unemployment rate remained perched at a 26-year high of 10.2 percent.

A report from ADP Employer Services on Wednesday showed 169,000 private-sector jobs were wiped out last month, more than economists had projected.

Despite this weakness, Lacker appeared confident the risk of an inflation spike was greater than the threat of a persistent decline in consumer prices.

We have seen that even in the early stage of a recovery, inflation and inflation expectations can drift higher, he said.

Lacker, a voting member of the Fed's rate-setting committee, is widely viewed as one of the most aggressive anti-inflation hawks at the central bank.

He was opposed to a number of the Fed's emergency lending facilities, particularly ones that target specific sectors of the economy like housing.

The perception of inflation risk could be particularly pertinent to the current recovery, given the massive and unprecedented expansion in bank reserves that has occurred, Lacker said.

Bullard also cautioned that the Fed's balance sheet -- which more than doubled to over $2 trillion during the crisis -- poses some medium-term inflation risk.

The St. Louis Fed president, who is seen as occupying the middle ground between anti-inflation hawks and growth-focused doves, will rotate into a voting seat on the Fed's policy-setting committee next year.

I do think there's some medium-term inflation risk because of the very large Fed balance sheet and because of the uncertainty about how these policies are going to affect the economy going forward, Bullard said.

(Editing by Andrew Hay)

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