Fed's Kohn: U.S. rates appropriate

By Kathy Finn

NEW ORLEANS (Reuters) - U.S. interest rates seem to be at the right level to help the sputtering economy without sparking inflation, but policy-makers need to be ready to adjust quickly in the face of a highly uncertain outlook, Federal Reserve Vice Chairman Donald Kohn said on Tuesday.

"With the information now in hand, it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term," Kohn told the National Conference on Public Employee Retirement Systems.

"But a large measure of uncertainty surrounds that judgment and as the economy evolves, so will the appropriate stance of policy," he added.

Kohn sent a clear warning that the Fed is now watching inflation developments closely, and expressed concern that if longer-term inflation expectations edge higher, policy-makers will be facing "a more serious situation."

In a potentially worrying signal of inflation pressures, a government report on producer prices released on Tuesday showed that so-called core inflation -- which strips out volatile food and energy costs -- had risen more than expected at the farm and factory gate in April.

At the same time, Kohn said officials will be carefully watching whether the U.S. economy can recover from the effects of a two-year housing slump and related credit crunch.

"We need also to carefully assess whether, after a period of near-term softness ..., the economy is likely to be on track for sustained economic expansion over time," he added.

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