Former Fed chief expects financial market pressure

MONTREAL (Reuters) - The possibility of a U.S. recession will put further pressure on financial markets in the coming months and push policymakers to implement regulatory reforms, former U.S. Federal Reserve Chairman Paul Volcker said on Monday.

"I suspect the apparent need for intensive and broad reform (of financial markets) will be reinforced in the coming months by further financial pressures, pressures likely to arise from the slowing U.S. economy and the possibility of recessionary tendencies," he said at a conference in Montreal.

Volcker said he hoped and expected the Fed to exercise "disciplined monetary management" to contain growing inflationary pressures.

"The obvious inflationary pressures from the oil and agricultural markets and from the depreciation of the dollar is surely a challenge, a challenge that must be met," he said.

He declined to comment on whether Fed Chairman Ben Bernanke should raise interest rates to fight inflation.

Volcker, who led a battle against double-digit inflation in the 1970s by raising interest rates sharply, said last month the United States could face a 1970s-style period of soaring inflation if there was a loss of investor confidence in the buying power of the U.S. dollar.

Volcker said at the conference that the credit crisis triggered by the U.S. subprime mortgage market collapse was a "clarion call" for policy makers, as it exposed shortfalls in the regulation of new financial instruments and non-bank financial institutions.

But improvements to regulations won't happen quickly, he said.

"I don't have any doubt that call has been heard right around the world ... It will take some years."

(Reporting by Louise Egan; Editing by Bernadette Baum)