Nov. 27 (Bloomberg) -- Federal Reserve Bank of Philadelphia President Charles Plosser said last month's interest-rate cut raises risks for inflation and may need to be reversed if consumer prices climb.

``If inflation begins to creep up or expectations of future inflation rise in the coming months -- which is a risk given the FOMC's decision to cut interest rates -- the outlook will be affected and policy may have to be adjusted,'' Plosser said in a speech in Rochester, New York.

The comments illustrate Plosser's reputation among economists as having one of the Fed's toughest anti-inflation stances. By contrast, the Federal Open Market Committee said last month, in a phrase repeated by officials including Chairman Ben S. Bernanke, that risks between inflation and economic growth are ``roughly'' balanced.

Plosser is also at odds with traders, who anticipate the central bank will lower the benchmark rate for a third straight meeting on Dec. 11. He doesn't vote on the rate-setting FOMC this year.

``Insurance is not free, nor should it be,'' Plosser said in prepared remarks, referring to lowering interest rates. ``It may exacerbate moral hazard problems,'' by encouraging investors to take risks, he said. It also ``creates a risk that inflation may be exacerbated and inflationary expectations may begin to rise,'' he said.

Plosser will vote on rate decisions for the first time next year, starting in January. The panel lowered the rate on overnight loans between banks a quarter-point to 4.5 percent on Oct. 31, following a half-point reduction on Sept. 18.

Not `Sanguine'

``While the inflationary signs in recent months have been encouraging, I do not think we are in a position to be sanguine,'' Plosser said in his speech at a seminar hosted by the University of Rochester's Simon Graduate School of Business, where he was formerly the dean.

Kansas City Fed President Thomas Hoenig preferred no change in interest rates at the October meeting, the first dissent since December 2006.

Today, Plosser reiterated his view that the first rate cut was ``appropriate.'' Yet he stopped short of endorsing the October reduction, omitting his own opinion when discussing the move.

`Little Data'

``There was very little data that we received during the inter-meeting period that suggested that the economy was performing worse than we had anticipated in September,'' Plosser said. ``Yet the committee felt that, given the uncertainties in the outlook, an additional reduction in the funds rate was appropriate.''

Futures tied to the Fed's benchmark rate suggest investors see a 92 percent chance of a quarter-point reduction next month. Traders expect the main rate to be cut to 3.25 percent or lower by August.

Last week, Fed officials, in their first quarterly economic outlook, lowered forecasts for U.S. growth next year and suggested the expansion won't reach its trend rate until 2009. Fed policy makers now expect gross domestic product to increase 1.8 percent to 2.5 percent in 2008, ``notably below'' the 2.5 percent to 2.75 percent they predicted in July.

Plosser said today his forecast is for 2.5 percent growth next year, putting him at the upper end of Fed policy makers. He predicted that residential investment will ``bottom out'' by the end of June and stressed that he already expects a ``brief period of sluggish growth.''

No Quick Reaction

``I will not be surprised to see weaker statistics making headlines,'' Plosser said today. ``Too often people seem to think that when a weak economic number is released, the Fed will respond to it immediately with a policy action.''

The Philadelphia Fed chief said figures would need to be ``much weaker than already anticipated and accumulate sufficiently'' to justify lowering his outlook further.

Among private economists, the number anticipating a recession almost doubled in the past two months, the National Association for Business Economics said last week.

The U.S. economy expanded at a 3.9 percent annual pace in the third quarter, the second straight period of growth near 4 percent. Economists expect the rate to slow to 1.5 percent in the three months ending December, the median forecast from a Bloomberg News survey.

Speaker's List

Plosser is the first of at least 10 policy makers starting today who may provide clues to whether the central bank will cut rates again. Later today, Chicago Fed President Charles Evans speaks, while Bernanke and Vice Chairman Donald Kohn deliver remarks later this week.

The Fed's preferred inflation gauge, which excludes food and energy costs, rose 1.8 percent in September from a year earlier, the fourth straight month below 2 percent. Bernanke and several other Fed officials have said their ``comfort zone'' for the index is 1 percent to 2 percent.

``I expect that inflation during the coming year will remain above the level I view as consistent with price stability, before diminishing thereafter,'' Plosser said without specifying his projections.

Plosser, 59, was a professor at the University of Rochester for 28 years before taking the helm of the Philadelphia Fed bank in August 2006. He was also co-chairman of the Shadow Open Market Committee, a group of economists that critiques Fed policy and has traditionally favored keeping inflation close to zero.

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

Last Updated: November 27, 2007 12:53 EST