"We can't sustain inflation at this pace,'' Lacker told reporters at the Richmond Fed's Charlotte branch. "Moderation in growth by itself isn't likely to bring down inflation dramatically.''
Lacker pointed out that when adjusted for inflation, the federal funds rate for overnight lending, currently at 2 percent, is at its lowest level in post-war history.
The Fed cut interest rates sharply from September of last year, when official borrowing costs stood at 5.25 percent, as the financial crisis that begun in the mortgage sector deepened.
Lacker said that trend is not sustainable, although he voiced deep concerns regarding the strength of the economy and the financial sector.
For one thing, Lacker said it was too difficult to tell when there would be a bottom for U.S. housing prices, which are at the center of the global credit crunch.
Many banks held real-estate linked assets on their balance sheets and are now posting massive losses. In the latest such news, JP Morgan announced it had racked up $1.5 billion of losses so far in the third quarter, while Wachovia boosted its tally of second-quarter losses to a gaping $9.1 billion.
In all, financial institutions globally have reported around $400 billion in losses, a staggering sum that amounts to nearly 3 percent of America's yearly economic output.
Lacker said it was impossible to know what the final count of mortgage-related losses would eventually be.
"Substantial uncertainty remains about the ultimate size of mortgage losses,'' he said.
Apart from the troubles in housing, Lacker said commercial construction could be the next sector to falter, posing a growth risk for the rest of the economy.
He also highlighted the weakness in consumer spending, which he said did not get as much of a boost from Congress' $150 billion stimulus package as had been hoped.
Talk To Me
In earlier, introductory remarks, Lacker emphasized the importance of clear communication to the Fed's ability to manage inflation.
He said that because future inflation depends on the public's expectations, monetary policy works best when policy-makers communicate effectively.
"The better ordinary people understand monetary policy, the easier our job will be,'' Lacker said.
He added that Fed Chairman Ben Bernanke is already much clearer than his predecessor, the often cryptic Alan Greenspan, adding that this was part of a long-term trend toward a more transparent central bank.
Moreover, basic public accountability is an integral part of a democratic society, Lacker said. "We owe it to the citizens to account for our conduct,'' he said.