UPDATE 1-Fed not inclined to hike rates in next few mths-WSJ

(Recasts with two media reports)

TOKYO, June 17 (Reuters) - The U.S. Federal Reserve is unlikely to raise interest rates in the next few months unless the inflation outlook worsens, while speculation that it could hike rates several times this year is probably overdone, media reported on Tuesday.

The Wall Street Journal said the Fed was almost certain to leave rates unchanged at its next meeting on June 24-25. The newspaper added in its online edition that while a rate hike in August cannot be ruled out, market expectations for such a move may be "overly aggressive".

The Financial Times, in its online edition, similarly warned that market expectations of aggressive rate hikes this year may be overdone.

U.S. short-term interest rate futures show that investors widely expect the Fed to raise rates by 25 basis points to 2.25 percent in August, and by 75 basis points before the end of the year. FEDWATCH

The WSJ said Fed officials for now wanted to both show their vigilance against inflation risks, especially from surging energy prices and the weak dollar, while also giving the economy time to recover from the trouble in the housing, labour and financial markets. "As a result, the Fed's policy statement following its meeting next Tuesday and Wednesday is likely to use stronger language about the risks from inflation than in May, but is unlikely to go so far as to ratify market expectations of a rate hike as soon as August," it said.

The FT said market expectations for the Fed to raise rates three or four times by the end of the year did not seem to match the balance of views within the U.S. central bank.

While some Fed officials now saw a heightened "tail risk" on the inflation side and were calling for rapid rate normalisation, a second school of thought inside the Fed did not share this view, the paper said in its online edition.

Tail risk refers to an outcome that is not likely to occur but would be very costly if it did, the paper said.

"These officials still envisage raising rates as market strains ease, the growth outlook improves, and to offset any rise in expected inflation, leaving real rates unchanged. But the pace of rate increases they anticipate is considerably slower than the first group," the FT said. Federal Reserve Chairman Ben Bernanke may stand somewhere between these two schools of thought, the paper said, but added: "he is likely to share at least a good part of the Fed doves' thinking".

"The market, meanwhile, appears to be taking its cue from the first group. Since the second group is influential, this could turn out to be a mistake," the FT said.

The WSJ said Bernanke and most other officials believed inflation expectations remained under control.

Bernanke and other Fed officials also believe financial markets remain especially fragile, it said, adding that raising rates soon could worsen this problem, hitting the mortgage sector and lengthening the housing downturn. (Reporting by Masayuki Kitano; Editing by Hugh Lawson)