The outlook of the U.S. interest rate policy is asymmetric, with further rate cutting bigger than the potential for increases, said St. Louis Federal Reserve Bank President William Poole on Wednesday.

The ongoing decline in the housing market would have a modest impact on U.S. economic growth, but the risk of a bigger impact could not be discounted, said Poole, a Federal Open Market Committee (FOMC) voter in 2007.

The FOMC has cut the federal funds rate twice in the past two months, with the benchmark lending rate dropping from 5.25 percent to 4.5 percent.

Financial markets estimate about a 70 percent chance that the FOMC will lower rates in December, to the end of 2007, to 4.25 percent.

It could be that the downdraft from the housing industry will spread to other sectors, which might require that recent rate cuts not be reversed, or even that additional cuts would be in order, Poole said.

The loss of wealth associated with the decline in housing prices, as well as the fact that mortgage payments will absorb a larger portion of disposable income for some consumers, might cause consumption -- the largest component of GDP -- to grow at a significantly slower rate, he said.

Poole also referred to the U.S. economic growth, saying it would stay subdued into 2008 but for the new year it shouldn't have its progress based on what is likely to be a weak fourth quarter.

Poole said that Fed is still in crisis-management mode following the credit crunch that hit financial markets in recent months.

Recent weeks events show clear progress in getting financial markets back to normal, although several years are still required to solve the problems with significant subprime mortgages and securities backed by such mortgages, Poole said.

The return of a balance of risks assessment to the Oct. 31 FOMC statement was a small step towards a return to normalcy after long financial market crisis in the last months.

Still, it is impossible to determine in advance what the schedule should be for the return to normal monetary policy-making, he said.

That, in turn, could stoke volatility as the market came to fear future interest rate increases to deal with rising inflation, continued Pool.

Poole expressed himself to be highly confident in the inflation outlook, despite the U.S. dollar's ongoing decline against major currencies.

In the past few weeks rising crude oil prices and a falling U.S. dollar have given birth to concerns about inflation, months after the central bank's favored inflation measure moved back into the informal comfort zone of 1 percent to 2 percent detained by some Fed policy-makers.

Pool also mentioned that a sustained increase in inflation expectations would create an unpleasant environment marked by higher long-term interest rates as the market demands more compensation for inflation.