INDIANAPOLIS - TOP officials from the Federal Reserve on Friday downplayed risks that the United States faces a devastating spiral of falling prices, even as economic growth has screeched to a halt.

The policy-makers were split, however, on how long the economic downturn will linger and what additional measures, if any, the Fed will try to turn things around - giving no clear read on what the next policy move will be.

Chicago Fed President Charles Evans said the risks of deflation are higher now than five months ago but are still small.

'The United States is undergoing disinflation, or a decline in the inflation rate,' as a result of rising unemployment and lower commodity prices, Mr Evans said after a speech to the Economic Club of Indiana in Indianapolis.

The total personal consumption expenditures (PCE) price index should fall to between 1.4 and 1.7 per cent in 2011 from 2.75 to 3 per cent this year, an outcome 'consistent with price stability'. Prices for long-dated US debt soared this week, pushing yields to 50-year lows, on worries about deflation whipped up by a record decline in consumer prices during October and a jump in new weekly claims for unemployment benefits.

But Mr Charles Plosser, President of the Philadelphia Fed, joined Mr Evans in tamping down the fears, saying deflation was not a real threat in the near term.

At a media workshop in Philadelphia, Mr Plosser described the current inflation trend as the backwash of the tidal wave experienced when energy and many other commodity prices reached record highs back in July.

'We don't want to read too much into these wild swings in commodity markets,' Mr Plosser said.

One of the US central bank's most consistent hawks, Richmond Fed President Jeffrey Lacker, said the Fed should keep its eye not on a downward spiral, but on the risk that inflation could accelerate along with growth before too long.

'Many analysts expect the US economy to regain positive momentum some time in 2009,' Mr Lacker said in a speech to the Tech Council of Maryland in Bethesda. 'That strikes me as a reasonable expectation ... It's essential that we not let inflation drift from view.' Mr Plosser said he expects a sharp contraction in growth in the final quarter of 2008 and anemic growth in early 2009, but also some improvement in the second half of next year. 'That will lead to a more normal and positive 2010,' he said.

Mr Plosser is a voting member of the Federal Open Market Committee (FOMC) in 2008. Mr Evans and Mr Lacker will vote in 2009.

Financial markets lean to another half-point interest rate cut at the Dec 15-16 FOMC meeting, which would take the Fed's benchmark lending rate to just 0.5 per cent.

Some analysts, citing the risk of deflation, have called on the Fed to lower the rate to zero in early 2009 to stem what is shaping up as one of the worst recessions since World War Two.

The FOMC then could enact alternative policies to boost the economy.

A dramatic downturn
Mr Lacker said that the major shocks to the US economy are subsiding and that monetary policy is 'quite stimulative'. That could make for an interesting debate with Mr Evans, who said that regardless of the Fed's series of rate cuts started in September 2007, financial conditions could not be termed accommodative now.

Mr Evans had the gloomiest outlook of Friday's Fed trio, noting that the unemployment rate will continue to rise for now despite the Fed's efforts and that a 'dramatic downturn' is under way.

'We likely are in for a protracted period of poor economic performance,' he said. A recovery might take root firmly only in 2010 and 2011, he added.

Attempting to handicap the severity of the current episode, Mr Evans said the collapse in consumer demand was on a par with the 1982 and 1990 recessions.

Mr Evans told reporters that approaching the so-called zero bound on interest rates was a 'complicated question'. -- REUTERS