Fed's Lockhart - Now not the time to be tentative

By Alister Bull

PALM BEACH, Fla. (Reuters) - The Federal Reserve can operate with zero interest rates if it has to and the U.S. recession will get worse before recovering in the second half of next year, a top Fed policy-maker said on Friday.

"Now is not a time to be tentative," Atlanta Fed President Dennis Lockhart told a business luncheon.

"The U.S. economy in September and October appeared to weaken dramatically ... Problems are now broad-based," said Lockhart, who will be a voting member of the Fed's interest rate-setting committee in 2009.

The United States was already in recession, he said, adding that growth in the fourth quarter may notch a steeper decline than the 0.3 percent annualized fall of the previous three months.

Lockhart also told the luncheon, hosted by the Business Development Board of Palm Beach County, that the Fed had not exhausted its ammunition.

"There are still many measures that can be taken if required," he said.

"In theory, we could go to zero (interest rates)," he said in response to a question from the audience. "You can operate monetary policy at zero by injecting liquidity into the system and in effect separating the interest rate from the liquidity measures that you've picked, so that's a possibility."

Palm Beach, and south Florida in general, have some of the highest levels of mortgage failure in the country.