Top Federal Reserve officials on Tuesday struck differing notes on the likely pace of the U.S. economic recovery and one warned that pockets of weakness must not deter the central bank from withdrawing its extraordinary economic support.

Jeffrey Lacker, the president of the Richmond Federal Reserve Bank and an outspoken anti-inflation hawk, said that if officials want to keep inflation in check, they cannot be paralyzed by patches of lingering weakness, which could persist well into the recovery.

The U.S. central bank has slashed borrowing costs to near zero percent and pumped more than $1 trillion into the banking system to stimulate the economy. The question of when to begin an exit from those measures is a topic of intense discussion.

Lacker said the recovery is solidly under way and he expects the economy to grow at a reasonable pace next year.

Two other senior Fed officials, Cleveland Fed President Sandra Pianalto and San Francisco Fed chief Janet Yellen, stressed that the economic recovery will be sluggish.

Yellen, however, told a panel in Hong Kong that the Fed knows it cannot maintain its easy money policy for too long once the economy has healed.

We all understand very well that we cannot have an accommodative policy for too long. That once these conditions no longer prevail, it is a core responsibility of the Federal Reserve to preserve price stability, she said.

Pianalto, who moves into a voting slot on the Fed's policy panel next year, said economic slack was high, bank lending restrained and credit terms tight, echoing a downbeat assessment from Fed Chairman Ben Bernanke on Monday.

Though we have seen some signs that the worst may be over, the housing industry is not out of the woods yet, nor is the broader economy, she told a conference in Columbus, Ohio.

The Fed cited substantial resource slack after its last policy meeting on November 3-4 as one reason it expects to keep benchmark interest rates ultra-low for an extended period.

With the U.S. unemployment rate at a 26-1/2 year high of 10.2 percent and ample idle factory capacity, officials have argued inflation is unlikely to be a problem anytime soon.


Lacker, a Fed voter this year but not next, gave a somewhat rosier outlook, saying he expects the economy to grow at a reasonable rate in 2010 as the housing sector recovers and consumers and businesses resume spending.

Risks that inflation will fall -- a sign of further economic weakness -- have diminished substantially since the beginning of the year, he said.

Lacker warned that the risk consumers and businesses lose confidence in inflation stability is greatest in the early years of an economic recovery. The Fed's actions to pump money into the system to spur recovery heightens this danger, he said.

In assessing when we will need to begin taking monetary stimulus out, I will be looking for the time at which economic growth is strong enough and well enough established, even if it is not especially vigorous, Lacker said.

The Fed took another small step on Tuesday to wind down its emergency support as financial markets improve. It shortened the maturity of the emergency loans it makes to banks at its discount window, which it had lengthened during the crisis.


Yellen joined a chorus of Fed officials, a group that includes Bernanke, who have played down concerns the central bank's easy money policy is fueling fresh asset bubbles.

Yellen, a Fed voter this year among the most growth-focused doves, said she sees no sign of a bubble in credit spreads and that she does not think U.S. stocks are overvalued.

But she said the Fed needs to keep an eye on asset markets.

A surge of speculative cash into overseas markets has sharpened the discussion among central bank officials on whether and how central banks should react to wild asset price swings.

Chinese banking regulator Liu Mingkang said on Sunday that low U.S. interest rates and a weak dollar posed a new systemic risk because they were fueling speculation.

Bernanke, in a rare comment on the U.S. dollar's value on Monday, acknowledged the currency's slump was causing some prices to rise, even as he said other factors restraining inflation argued for a long period of low U.S. rates.

European Central Bank President Jean-Claude Trichet on Tuesday said he fully backed Bernanke's comments that the Fed was attentive to changes in the value of the dollar.

I believe that the strength of the dollar within the set of floating currencies is in the interest not only of the United States, but of the entire international community, Trichet said.

Lacker said the Fed would pay attention to the falling value of the dollar, but only insofar as it impacts the central bank's objectives of domestic price stability and sustainable growth.

(Additional reporting by Kevin Plumberg in Hong Kong and Kristina Cooke in New York; Editing by Leslie Adler)