(Adds earlier comments from Philly Fed economists)
By Pedro Nicolaci da Costa
PHILADELPHIA, Nov 21 (Reuters) - The troubled U.S. housing market should find a bottom in the middle of 2009, Philadelphia Federal Reserve President Charles Plosser said on Friday, but he acknowledged the outlook remains highly uncertain.
"Housing markets should begin to firm up next year," Plosser said. But he added: "The economy is going to be very weak in the fourth quarter."
Speaking to reporters after a media workshop at the regional central bank, Plosser said the economy had slowed dramatically, making runaway price growth less of a concern.
"I'm not too worried about inflation," Plosser said.
Yet Plosser said he was also not worried about the threat of deflation, a worry that resurfaced after a record pullback in inflation during the month of October.
He described that retreat as a mirror image of the jump experienced when energy and commodity prices reached record highs back in July.
Plosser, a long-time advocate of an explicit inflation target, said such a policy was not just useful in combating price rises but also pervasive and self-reinforcing cost declines.
Still, he argued that deflation was not a real threat in the near term.
The regional Fed president warned that the unemployment rate was likely to continue rising well into next year, but noted that the job market is usually a lagging indicator, and therefore should not be construed as a sign that things are getting continually worse.
Plosser said he expects a sharp contraction at the end of this year and anemic growth in early 2009, but also some improvement in the second half of next year.
"That will lead to a more normal and positive 2010," Plosser said.
Asked about the rising U.S. budget deficit, Plosser said it did not stand high on his list of concerns. While the U.S. debt burden was growing, he said it was still historically manageable.
"I don't think we're in danger," he said.
UNCHARTED WATERS
Earlier, Philadelphia Fed economists told reporters the U.S. economy faced considerable downside risks stemming in part from an unprecedented spike in foreclosures that shows no sign of abating.
The Fed has taken dramatic steps to buffer the downturn, including steep interest rate cuts down to the current 1 percent and massive liquidity efforts aimed at propping up the financial system. This does not mean, however, that growth will bounce right back.
"It's amazing how much things have deteriorated in the past month," said Herb Taylor, economist and corporate secretary at the Philadelphia Fed at a media workshop inside the central bank. "We are in uncharted territory."
He pointed to the Philly Fed's recent forecasting survey, which suggests the economy will contract over the next few months before returning to anemic growth rates in mid-2009, but added that the downside risks were considerable.
Asked about the potential for deflation to take hold now that commodity prices have tumbled, Taylor said the ability to pay interest on bank reserves gave the Fed additional tools to fight any persistent and damaging price declines.
"We have the quantitative measures in place to keep the liquidity going," Taylor said. "Whether it would work or not is an open question."
The Fed's economists saw little sign of improvement in the troubled housing market, which helped spark the country's financial crisis.
"Until now, there's no sign of deceleration," said Wenli Li at a media workshop at the Philly Fed.
In this context, economists generally expect the U.S. central bank will cut interest rates yet again this month, bringing them very close to zero. (Editing by James Dalgleish)