Fed officials still wary on inflation

LOS ANGELES (Reuters) - Federal Reserve policy-makers on Friday indicated they are still wary about the potential upside risks to inflation despite signs that price pressures may be abating.

The Fed has kept its benchmark interest rate steady at 5.25 percent since June, in the hope that slower economic growth will curb inflation. Financial markets expect the central bank to cut rates later this year.

Dallas Federal Reserve Bank President Richard Fisher, speaking in Los Angeles, said he would like to see inflation well below 2 percent.

"I don't like to be pinned down on a number. I will be personally ... much more comfortable when we get that well below 2 percent, and I'll leave it at that," Fisher said when asked if 2 percent was the maximum rate of inflation with which the U.S. central bank was comfortable.

Inflation may be ebbing from elevated levels, but the Federal Reserve is monitoring price trends closely, he said.

"There is hope that we may be turning the corner on inflation, but that needs to be confirmed and we are still vigilant," said Fisher, who is not a voting member of the U.S. central bank's policy-setting Federal Open Market Committee this year.

Some policy-makers have indicated they would like to see core inflation, as measured by the price index for personal consumption expenditures, or PCE, at around 1 to 2 percent. Core PCE was at 2.2 percent in the past year.

Separately, San Francisco Federal Reserve Bank President Janet Yellen said the current U.S. inflation rate of a little over 2 percent is at the upper end of her price stability range.

"I don't have a firm ... view ... I would say that the current inflation rate of a little bit over 2 percent is at the upper end," she said in response to a question.

Yellen, speaking in Sacramento, repeated her view expressed earlier this week that while inflation remained the predominant risk, policy was now "well-positioned" to bring it down.

Despite somewhat hawkish rhetoric from the Fed policy-makers, market reaction was subdued as U.S. Treasuries rallied on concerns over the struggling subprime mortgage market and rising tensions with Iran.

WATCHING VIGILANTLY

Fisher, when asked by reporters about the Fed's warning on inflation risks in the minutes of its January 30-31 meeting released earlier this week, spelled out where he saw the danger in terms of growth or inflation.

"Clearly, if I were to be asked which I had more concern about, it would be that there are still risks to the upside. In the distribution curve, there is a tail that is a little bit fatter in terms of risks to the upside on inflation," he said.

Minutes from the January FOMC meeting showed the Fed was retaining its stance of watching vigilantly for inflation.

"Participants did not yet see a downward trend in core inflation as definitely established," the minutes said, meaning policy-makers remain ready to push rates up if needed.

However, Fisher reiterated his optimism that price pressures would abate over the course of this year, while growth would come in around 3 percent of gross domestic product.

"If we conduct the right policy, I believe we can bring inflation, have inflation this year at or below 2 percent."

Yellen also said that while core inflation remained higher than she would prefer, "it has begun to ebb modestly in recent months."

On Wednesday, St. Louis Fed President William Poole said the Fed would act pre-emptively if it must to curb a price breakout, even though he saw prospects as "pretty well balanced" for noninflationary growth.

Poole is a voting member on the FOMC this year.

(Additional reporting by Jim Christie in Sacramento)