US near recession, Fed policy-maker warns

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that it has permitted non-banks to go to its discount window for cheap loans.

"All of these innovations are designed to bolster market liquidity and promote orderly market functioning," Pianalto said. "Liquid, well-functioning markets are essential for promoting financial stability and economic growth."

There was not much growth in the fourth quarter, the Commerce Department confirmed on Thursday as it reported gross domestic product grew at a scant 0.6 percent annual rate after expanding at a 4.9 percent clip in the third quarter. Corporate profits shrank as the year ended, and growth is widely seen as having slowed or stopped this year.

Fed Board Governor Frederic Mishkin spoke later on Thursday. He largely avoided commenting on the current economy, but conceded that policy-makers had their work cut out.

"This is as complicated a policy environment as you can get, with supply shocks that are inflationary at the same time that we have shocks that are contractionary from the financial sector," he told an audience in Lexington, Virginia, as he elaborated on why having a specific inflation target was good monetary policy.

US headline consumer inflation rose 4 percent in February versus a year ago due to higher food and energy prices. But the Fed has been forced to put qualms about price pressures on the back-burner while it fights the financial crisis

"You want to stabilize inflation so that you stabilize output as well. And what is important in that context is that you stabilize inflation in the longer run, Mishkin said.

Pianalto, meanwhile, defended the Fed's decision to directly fund JPMorgan Chase's deal to buy ailing investment bank Bear Stearns, saying turbulent times call for extraordinary measures.

Speaking in Seoul, Boston Fed President Eric Rosengren said US unemployment would rise as growth slows and it would not be safe to declare the financial strains over until the housing market has found its footing. He also warned there would be more bank failures ahead.