By Nick Olivari

NEW YORK (Reuters) - A number of factors are holding back U.S. growth, but interest rates are now at a level that should help bolster the economy starting in the second half of 2008, Chicago Federal Reserve Bank President Charles Evans said on Wednesday.

"The policy actions taken in March, in combination with earlier moves, should help to promote moderate growth over time and moderate the risks to economic activity," Evans said in a speech to the New York Association for Business Economics.

"The effects of last fall's rate cuts are probably just beginning to be felt, and the cumulative declines should do more to promote growth going forward," he said.

Evans said in a question and answer question with reporters that the outlook for an improvement in economic conditions in the second half of the year is based on one-time U.S. income tax rebates and the expected impact of interest rate cuts, and may be adjusted.

"We are in the first half right now and that is a forecast," he said.

As growth starts to rebound, the central bank needs to be "mindful" of inflationary pressures, especially as core inflation runs at undesirably high levels, he said.

The policy-setting Federal Open Market Committee has lowered its benchmark federal funds rate by 300 basis points since mid-September, to the current 2.25 percent from 5.25 percent. In the most recent move, the Fed last week cut the fed funds rate by 75 basis points.

Financial markets currently look for another one-quarter point rate cut in April.

Evans is not a voting member of the FOMC in 2008.

The three-month average of the Chicago Fed's national activity index, which conglomerates dozens of monthly economic indicators, suggests "little or no economic growth over the last few months," Evans said.

Evans said the Fed must be aware of the risk that disruptions in financial markets, against the backdrop of weak growth, could "reinforce the weakness in the economy."

Although recent concerns have been centered on growth, Evans said the Fed must be "mindful of inflationary pressures" and consider its dual mandate of supporting growth while keeping inflation in check. Evans said inflationary pressures are still stronger than most central bankers would like to see.

He termed recent news on inflation "disappointing," saying core inflation, at an annual rate of 2.2 percent, is at "a higher rate than I would like to see in the long run."

"We are hearing numerous anecdotes of firms passing on cost increases to their downstream customers, and some indicators of inflation expectations have risen," Evans added.

At this point, the Fed must weigh the impact of troubled financial markets on the economy in considering moves on interest rates.

"The weighing of risks to growth and inflation must also carefully account for the risk that poorly functioning financial markets will disrupt real economic activity," Evans noted.

"At times, adjusting the federal funds rate may not be enough to address the special circumstances we face in financial markets, particularly with regard to liquidity and the smooth functioning of markets."

The work now being done by banks to clean up their balance sheets "will eventually reduce strains on the real economy from financial conditions," Evans said, especially when complemented by the Fed's string of moves to bolster liquidity.

Evans said the U.S. consumer has been remarkably "resilient" but given the current employment situation, there will be "challenges" for U.S. consumers on incomes and household wealth.

Evans added the central bank has been "paying attention" to implications that developments in the foreign exchange market are having on the U.S. economy, inflation and the consumer.

(Additional reporting by Ros Krasny; Editing by Leslie Adler)