Atlanta Federal Reserve Bank President Dennis Lockhart said on Friday that market turmoil could hit the U.S. economy and a moderation in inflation gave the Fed room to cut interest rates last week.

"Going in to the September 18 ... meeting, my opinion was that the balance of risks to the economy had shifted from higher inflation toward slower real growth," he said in remarks to a conference sponsored by Middle Tennessee State University.

"I believed, and still do, that the factor weighing most heavily on this change in the outlook has been the potential negative ramifications of the financial turmoil," he said.

Lockhart is not a voting member of the Fed's interest rate setting committee this year.

The Fed cut the overnight federal funds rate target by a half-percentage point to 4.75 percent last week to shield the economy from the slumping housing sector and said the economic outlook had become less certain.

While the rate reduction sparked some concerns in financial markets over the potential for future inflation, Lockhart said inflation expectations remained under control.

"Currently, I believe long-term inflation expectations remain anchored, and measures of current inflation have decelerated during the year from elevated levels in 2006."

"While inflation is currently at the upper bounds of my comfort zone, the Fed has made progress against it. That's why I believe the recent moderation of inflation readings allowed a tactical move to reduce risks to the general economy with a fed funds cut," he said.

Interest rate futures imply a very high likelihood the Fed will cut another quarter point from its target rate at its next scheduled meeting on October 30-31.

Lockhart said the housing market would not start to recover for many months to come and that housing-related fallout could dent consumer spending, which has been a mainstay of growth.

"I believe the bottom of the housing downturn could be a ways off -- potentially the second half of 2008 or later, he said. "If the housing downturn intensifies, I believe consumer spending is vulnerable to further weakening."

Inflation