The downside risks to growth have recently risen and the economy is expected to be "extremely sluggish" in 2008, according to one Fed official on Friday.

Chicago Fed President Charles Evans (non-voter) said the U.S. economy faces a triple-front threat as growth risks are on the rise, inflation is "unsettingly high" and financial markets remain in turmoil amidst depressed housing and auto markets.

"Although real activity is weak, we also are simultaneously experiencing bad news on the inflation front in the form of higher energy and commodity prices. This creates the challenge of facilitating the economy's return toward more favorable growth rates without igniting greater inflationary pressures," he said in Bloomington, Illinois.



"The financial turmoil and subsequent tightening of credit conditions add another dimension of difficulty to the problem," he added.

Evans said the confluence of these threats have "added layers of complexity to the management of monetary policy," making the decision-making process more complicated than usual.

He said monetary policy to date has been "relatively accommodative," but inflation risks - which he called "persistently high" - present additional challenges for policy.

The Fed has attempted to solve these issues by injecting liquidity into the markets and focusing on broader macroeconomic goals, which he said is consistent with the central bank's dual mandate.

By Patrick McGee and edited by Nancy Girgis