UPDATE 2-Fed's Lacker says inflation is a problem

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By Alister Bull

CHARLOTTE, N.C., April 17 (Reuters) - The U.S. economy is going through a contraction but inflation is too high and may not abate as hoped, a top Federal Reserve policy-maker said on Thursday.

"Inflation is a problem now. It is too high and personally I would be uncomfortable in waiting for economic slack to bring it down," Richmond Federal Reserve President Jeffrey Lacker told reporters on the sidelines of a conference here.

"I am particularly concerned about movements in measures of expected inflation," he said.

Lacker is not a voting member of the Fed's interest-rate setting committee this year. He is seen as one of the most hawkish Fed policy-makers and voted repeatedly for higher interest rates in 2006, when the Fed stopped raising its benchmark overnight funds rate.

Falling U.S. house prices and the collapse of the subprime mortgage market have chilled growth and Lacker acknowledged the economy had faltered. But he ducked the question of whether the economy was now in a recession.

"It is important not to get wrapped up in dancing on the head of a semantic pin," he said.

"I am expecting a contraction in economic activity in the first half of this year. And whether the NBER (National Bureau of Economic Research) decides it is a recession ... I am willing to wait," he said, referring to the country's official arbiter of the business cycle.

The Fed has slash rates 3 percentage points to 2.25 percent since mid-September to shield the economy from the housing crisis and resulting market strains. Lacker said the economy was not yet out of the woods and the healing process would take time.

"It is not over yet. I don't think it is going to end all at once," he said.

"I think the crucial variable is stability in the retail housing market, in a broad enough number of geographies that we can have some confidence about where housing prices are going.

"The other major source of uncertainty that I think is consequential is nonresidential construction spending, and we'll just have to see how that plays out," he said.

Lacker declined to say if he would have dissented at the last meeting, when the U.S. central bank lowered its benchmark overnight funds rate 75 basis points to 2.25 percent, but made plain that he was not at ease with current price pressures.

"I am uncertain about the extent it will moderate," he said, when asked about the Fed's forecast that inflation will be kept in check by the slackening U.S. economy.

"Looking at our record over the last 4 years of inflation that has fluctuated between just below 2 percent and (above) 3-1/2 percent, the danger in that pattern persisting is that people might become accustomed to it, and come to expect inflation to continue at rates greater than we would like to see," he said.