Fed officials remain worried about inflation

(Adds comments from Chicago Fed's Moskow)

By Pedro Nicolaci da Costa

NEW YORK, April 11 (Reuters) - Federal Reserve officials left little doubt on Wednesday that stubbornly high inflation was still their main worry, even after a period of softer economic growth.

The Fed could find itself in a bind later this year if inflation stays high, Richmond Fed President Jeffrey Lacker, one of the bank's biggest inflation hawks, said in a speech.

Later, the Chicago Fed's Michael Moskow repeated his view that risks of high inflation outweighed those of growth dropping too low.

The Federal Open Market Committee (FOMC) said in minutes from its March policy meeting, released on Wednesday, that there was enough uncertainty in the economic outlook that singling out the likelihood of an interest rate increase no longer seemed appropriate.

Even so, policy-makers were said to agree that "further policy firming" might be needed to tamp down inflation, and that all FOMC members agreed the predominant policy concern remained inflation.

The Federal Reserve has held interest rates steady at 5.25 percent at its past six meetings.

Financial markets guess that the Fed's next move will be a rate cut, but they now see little chance of an easing before the third quarter -- in part because of a steady parade of Fed speakers talking tough on inflation.

"Inflation is running too high," Moskow, an FOMC voter this year but one who will retire in August, said in a speech to the Kenilworth Union Church, outside Chicago.

Still, Moskow stopped short of explicitly calling for additional rate hikes, as he did in a series of speeches over the winter and fall.

"Whether policy will need to be adjusted and the degree of any adjustment will depend on the data we see in the months to come and how that data influences our forecast of the economy," he said.

Earlier, the Richmond Fed's Lacker fretted that inflation had not been pulled down by several quarters of softer economic growth.

Lacker dissented four times late in 2006 in favour of another rate rise because he was worried that inflation might not come down quickly enough. This year, while not an FOMC voter, his views hare stayed consistent.

"If inflation does not moderate, I believe additional firming may be needed," Lacker told reporters after a speech to the Charlotte Economics Club in North Carolina.

SANGUINE ON HEDGE FUNDS

Fear of inflation was in sharp contrast to the Fed's rather sanguine view of the roughly $1.4 trillion hedge fund industry, which some analysts fear is so large it carries risks to the financial system.

Federal Reserve Chairman Ben Bernanke also spoke on Wednesday but avoided talking about current policy and said simply the system of hedge fund self-regulation seemed to be working well.

Bernanke said light regulation, limited to vague registration requirements, seemed appropriate, given the benefits they provide to the financial system.

"Market discipline does not prevent hedge funds from taking risks, suffering losses, or even failing -- nor should it," the Fed chief said.

"If hedge funds did not take risks, their social benefits -- the provision of market liquidity, improved risk-sharing, and support for financial and economic innovation, among others -- would largely disappear."

Hedge funds' activities are expected to be discussed by finance ministers from Group of Seven nations -- the United States, Britain, Canada, France, Germany, Italy and Japan -- on Friday.

(Additional reporting by Ros Krasny, Tamawa Kadoya, Alister Bull and Mark Felsenthal)

((Reporting by Pedro Nicolaci da Costa, editing by Alan Raybould; Reuters Messaging: pedro.dacosta.reuters.com@reuters.net; e-mail: pedro.dacosta@reuters.com; +1-646-223-6310)) Keywords: USA FED

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