Nov. 13 (Bloomberg) -- Federal Reserve Bank of Philadelphia President Charles Plosser said the U.S. economy's slide will deepen this quarter and growth will remain ``weak'' into 2009 as the credit crisis and global slump impede a recovery.

``The economy still faces significant financial stress and the outlook remains highly uncertain,'' Plosser said in a speech in Pittsburgh today. ``While the actions by central banks and governments in a number of countries have helped alleviate some of the financial pressures, it will still take some time before financial markets return to some sense of normalcy.''

The Fed has cut the benchmark interest rate to 1 percent and provided more than $1 trillion in loans to banks and other financial institutions to mitigate the worst credit crunch in seven decades and head off a global recession. Still, the economies of the U.S., Japan, U.K. and euro region will probably shrink simultaneously next year for the first time since World War II, the International Monetary Fund said last week.

The fourth quarter will show a ``somewhat sharper decline'' than the economy's 0.3 percent contraction in the third period, Plosser said.

While Plosser said the recent drop in fuel costs has diminished his concern about inflation expectations, officials shouldn't be ``complacent'' about their responsibility for stable prices. At the same time, Plosser didn't rule out further Fed interest-rate reductions.

Global Slowdown

``Since our economy has benefited substantially from strong exports over the past two years, the prospect of a global slowdown further contributes to a weaker outlook for the U.S. economy,'' Plosser said in prepared remarks to the Economic Club of Pittsburgh.

Separately, Minneapolis Fed President Gary Stern said today many markets remain distressed even after policy makers stepped up injections of cash and capital into the economy.

Plosser backed the Federal Open Market Committee's Oct. 29 decision to lower the main overnight lending rate target by a half percentage point. He voted against rate cuts in March and April. The FOMC next meets Dec. 16, after that, Plosser won't hold a voting slot for two years.

The U.S. economy may contract at a 3 percent annual pace this quarter, the median estimate in a Bloomberg News survey of 59 analysts this month. Economists don't expect growth to resume until the three months ending in September 2009. The Fed is forecast to reduce the federal funds target rate to 0.75 percent by the end of December and 0.50 percent in the first quarter.

Updated Forecasts

Fed governors and district-bank presidents updated forecasts at the FOMC's Oct. 28-29 meeting. Those will be released along with the meeting minutes on Nov. 19.

Plosser said economic growth is likely to be ``below 2 percent'' in 2009 and ``relatively weak'' for several quarters, pushing the unemployment rate above 7 percent next year before a ``gradual decline'' in the second half.

The economy will be close to its potential growth rate of 2.7 percent in 2010 and 2011, and the jobless rate will decline to ``near 5 percent,'' Plosser said.

The Fed must end its new loan programs in a ``timely fashion'' or risk fueling inflation, he said. In addition, Fed officials need to set clear guidelines for lending policies in the next crisis to avoid distorting markets and encouraging investors to take too much risk, Plosser said.

Plosser reiterated his concern that lawmakers will give the Fed new mandates that conflict with the central bank's mission of ensuring stable prices. It's ``unrealistic'' that expanding the Fed's regulatory and supervisory powers and charging it with achieving financial stability would prevent financial crises, he said.

Allocating Credit

Expanding the Fed's lending too much may compromise the central bank's independence on monetary policy, Plosser said. ``If government must intervene in allocating credit, doing so should be the responsibility of the fiscal authority rather than the central bank,'' he said.

Plosser said in response to an audience question that he doesn't think the Fed has authority to lend to municipalities. Florida's chief financial officer last month said states and cities should be included in aid from the Fed.

Also, pricing troubled assets as part of the $700 billion financial rescue plan crafted by Treasury Secretary Henry Paulson would have been ``incredibly difficult,'' Plosser said. Paulson yesterday abandoned plans to buy such assets. Plosser said he supports using the funds to inject capital into banks.

Market Strains

Plosser also defended the government's decision to let Lehman Brothers Holdings Inc. go bankrupt Sept. 15, saying it was a ``reasonable judgment based on systemic risk'' and that the investment bank's failure ``was a symptom and not the cause'' of the intensified financial-market strains later in September and October.

Plosser, 60, a former professor and business-school dean at the University of Rochester in New York, has taken one of the toughest anti-inflation stances on the Fed since joining the central bank in 2006.

While Plosser supported the most recent interest-rate reduction, he said in an Oct. 8 speech that pursuing an ``inflationary monetary policy in order to temporarily alleviate funding pressure on financial institutions'' would be a ``mistake.''

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Anthony Massucci in Pittsburgh at amassucc@bloomberg.net.

Last Updated: November 13, 2008 14:19 EST