Sept. 26 (Bloomberg) -- Federal Reserve Bank of Philadelphia President Charles Plosser said last week's interest-rate cut could cause inflation to accelerate and that policy makers must be ready to reverse course if needed.

``Cutting the funds rate has the potential for aggravating inflation, there's no question about that,'' Plosser told the New Jersey Technology Council late yesterday. Should inflation or price expectations rise in coming months, ``the outlook will be affected and policy may have to be adjusted.''

Plosser, who doesn't vote on rates this year, is the first official to express concern about the Fed's Sept. 18 decision to lower the benchmark interest rate by a greater-than-forecast half-point. The reduction, while ``appropriate'' because of slowing job growth and falling home prices, shouldn't lead to further moves unless data become ``much weaker,'' he said.

``I will not be surprised to see weaker statistics,'' Plosser said in the speech in Mount Laurel, New Jersey. ``But weaker numbers will not lead me to revise my outlook or my view of the appropriate funds rate target unless they are much weaker than already anticipated and accumulate sufficiently to generate another downward revision in my outlook.''

The Federal Open Market Committee unanimously voted to reduce the rate on overnight loans between banks to 4.75 percent, the first cut in four years, aiming to keep financial-market turmoil from ending the U.S. economy's six-year expansion.

Traders expect the Fed to lower the rate a quarter-point at each of the next two FOMC meetings, on Oct. 30-31 and Dec. 11, based on futures prices.

`Appropriate' Move

``A slower economy means that real interest rates must decline to bring about the appropriate adjustments to restore growth,'' Plosser said. ``In recognition of this, I believe last week's action to lower the fed funds rate target was appropriate.''

Economic reports yesterday bolstered the case for the Fed to keep cutting rates. Consumer confidence slumped to the lowest level in almost two years, a Conference Board index showed. The National Association of Realtors said August sales of previously owned homes dropped to the weakest pace in five years.

Two-year Treasury note yields declined 2 basis points to 3.97 percent as of 7:49 a.m. in London. Against the euro, the dollar traded at $1.4128 in London and reached $1.4162, the lowest since the European currency's debut in January 1999.

Plosser's remarks contrast with comments by other Fed officials since the Sept. 18 decision. Chairman Ben S. Bernanke and Vice Chairman Donald Kohn didn't mention risks from the rate cut in remarks last week.

Asset Prices

Bernanke told lawmakers the move was designed to ``try to get out ahead of the situation, try to forestall potential effects of tighter credit conditions'' on the economy. Kohn said in Frankfurt that the central bank was motivated by the potential for asset-price shifts to affect growth and inflation.

Plosser, whose anti-inflation remarks have been among the Fed's toughest since he joined the central bank last year, had expressed skepticism about the economic risks from financial turmoil 10 days before the Fed meeting. While the surprise loss of U.S. jobs in August was ``not encouraging,'' it didn't on its own justify lowering rates, Plosser said Sept. 8 in Hawaii.

The Labor Department said Sept. 7 that employers cut 4,000 workers in August, the first drop in four years.

Yesterday, Plosser said the June and July job-growth figures, which were revised lower, were ``more troubling'' and suggest the labor market ``may not be quite as tight or as robust as we previously thought.''

Rebound in Growth

At the same time, ``there is also the possibility that growth will rebound more quickly than is now anticipated,'' he said. ``If so, and the outlook is revised upward, monetary policy makers will have to reassess'' policy, he said.

Plosser, who votes on rates for the first time in 2008, emphasized that ``price stability is and should be the primary focus of monetary policy.'' Officials ``must resist the temptation to respond to short-term, transitory disturbances'' unless they affect the Fed's long-term goals, he said.

Plosser, 59, is a former professor and business-school dean at the University of Rochester who took the helm of the Philadelphia Fed bank in August 2006. He was previously 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.

The risks from the rate cut underscore the need to have a public, numerical inflation goal, a topic debated by Fed officials for the past year, Plosser said. It's not the exact target for inflation, that matters, he said, but the idea that the Fed has a stated ``commitment.''

Separately in yesterday's speech, Plosser said the economy can expand at about 2.75 percent annually over the next few years without stoking inflation. He estimated longer-term productivity growth at ``slightly below 2 percent.''

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

Last Updated: September 26, 2007 02:53 EDT