Fed's Tarullo - global downside risks are policy factor

By Howard Schneider and Douwe Miedema

WASHINGTON (Reuters) - Downside risks to the global economy are a factor the Federal Reserve will have to consider even as the U.S. economy recovers from the 2007-2009 financial crisis, Fed Governor Daniel Tarullo said on Saturday.

Tarullo, a voting member of the Fed's policymaking committee, also said the U.S. economy is facing deep problems from decaying infrastructure to a polarized income distribution that could weaken demand in the future.

"I am worried about growth around the world, there are more downside risks than upside risks," Tarullo said at a conference of the Institute of International Finance in Washington.

"Other major economies are tilting or at least showing risks that are a little bit more to the downside than to the upside and this is obviously something we have to think about in our own policies," he said.

The Fed is expected to begin raising interest rates sometime next year. Many Fed officials have indicated they do not want to begin raising rates until it is clear the U.S. recovery is sustainable and can withstand a policy tightening.

That has become less certain in recent weeks as concern has mounted over Europe's potential to slip back into recession, and recognition that investment, household spending and other elements of aggregate demand globally have lagged.

Tarullo said U.S. regulators were still determining the full fallout from the financial crisis and Great Recession, but he added it had become clear the United States "is going to have to address some pretty fundamental problems."

"An aggregate demand problem is not unrelated to income distribution ... Right now the physical capital stock (of the country) is about as old as it has been in the post World War Two era ... That suggests an underinvestment," he said.

"This is not a quick turnaround," Tarullo said.

(Reporting by Douwe Miedema and Howard Schneider; Editing by Paul Simao)