Jan. 8 (Bloomberg) -- Federal Reserve Bank of Philadelphia President Charles Plosser said further interest-rate cuts may be needed should the outlook for U.S. economic growth become ``substantially weaker'' than already projected.

``A substantially weaker outlook than expected, particularly if that weakness is projected to be more prolonged than anticipated, may require further adjustments to policy,'' Plosser said in a speech in Gladwyne, Pennsylvania. He said he already expects several ``sluggish'' quarters of growth.

Plosser, who votes this year on rates for the first time since he joined the Fed in 2006, also indicated an increasing concern about inflation. He refrained from indicating whether he favors reducing rates this month, while traders anticipate the Fed will lower its benchmark as much as half a point.

``I see more worrisome signs of underlying price pressures,'' Plosser said in prepared remarks to the Main Line Chamber of Commerce. He said he also senses that ``inflation expectations are more fragile now than they were six months ago.''

The Fed's preferred gauge of consumer prices rose 2.2 percent in November from a year before, the most since March. Atlanta Fed President Dennis Lockhart yesterday said he was ``troubled'' by inflation, while highlighting that the ``pivotal question'' for the economy is the impact on growth from housing and financial market turmoil.

`Difficult and Costly'

``If inflation expectations continue to rise, it will be difficult and costly to the economy to deliver on our goal of price stability and puts at risk the Fed's credibility for maintaining low and stable inflation,'' Plosser said today.

Some of Plosser's previous remarks in recent months, showing one of the Fed's toughest anti-inflation stances, have run contrary to the direction of monetary policy.

On Nov. 27, Plosser said the October cut in the benchmark interest rate to 4.5 percent raised risks for inflation and may need to be reversed if consumer prices climb. Over the following two days, Fed Chairman Ben S. Bernanke and Vice Chairman Donald Kohn highlighted concern about deteriorating conditions in financial markets, signaling policy makers could lower rates again at the Dec. 11 meeting.

``The markets have gradually improved since the end of the year,'' Plosser said in response to an audience question. ``There's some stability in the last week. That's encouraging. But it's not over with yet, and it still may take some time.''

Rate Expectations

The Federal Open Market Committee cut the overnight lending rate between banks by a quarter point last month, to 4.25 percent. Traders see a 66 percent chance of a half-point cut at the Jan. 29-30 meeting, with 100 percent odds of at least a quarter-point move, futures prices show.

``The FOMC sits down and tries to make the very best decisions it can,'' Plosser told the audience. ``I don't think that is the appropriate role for monetary policy, to do what the markets think we should be doing.''

Plosser told reporters afterward that he is undecided on additional interest-rate reductions. ``I have certainly not made up my mind in any way whatsoever about whether further rate cuts are called for or not called for,'' he said. ``I am really open to listening to all sorts of data.''

Kohn said last week that investors ``should understand'' that officials ``do not coordinate schedules and messages, and that members' views are likely to be especially diverse'' when circumstances are rapidly changing.

Bernanke is scheduled to speak Jan. 10 on the economic outlook. Boston Fed President Eric Rosengren, who dissented from the last interest-rate reduction in favor of a half-point cut, gives a talk later today, and three other officials speak later this week.

Ramifications for Economy

Plosser said the Fed, in lowering its benchmark interest rate 1 percentage point last year, was responding to changes in its economic outlook, yet there's ``limited'' evidence backing concern that the ``strains in financial markets might have ramifications for the broader economy.''

``This price-discovery process is going to take some time,'' Plosser said, referring to the process of investors determining out the value of securities backed by assets including subprime mortgages. ``It's going to be measured in months and quarters before this all sorts itself out.''

The increase in the unemployment rate to 5 percent in December marked a ``somewhat sour note,'' Plosser said. The rate ``may rise somewhat above 5 percent'' this year, he said, with slower job growth for two to three quarters.

Housing Outlook

Plosser said he expects the housing recession to ``bottom out near the middle of the year,'' then the industry should ``turn slightly positive in the latter part of 2008.'' He didn't anticipate ``significant improvement'' until 2009.

At the same time, Plosser said he's concerned that the Fed's interest-rate decisions this year will be tougher because of inflation, which is spreading beyond fuel costs. Crude oil futures reached a record $100.09 a barrel on Jan. 3, and prices are up 69 percent from a year ago.

``Recent data suggest that inflation is becoming more broad-based,'' he said. ``Recent increases do not appear to be solely related to the rise in energy prices.''

The Philadelphia Fed chief also said ``we should not rely on slow growth to reduce inflation,'' noting that this approach failed in the 1970s.

Plosser, 59, was a professor at the University of Rochester for 28 years, also serving as dean of its business school for a period, 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, Craig Torres in Gladwyne, Pennsylvania, at ctorres3@bloomberg.net.

Last Updated: January 8, 2008 10:15 EST