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Fed hawks worry about threat of inflation

President and CEO of the Federal Reserve Bank of St. Louis James Bullard poses during an interview at the Federal Reserve Bank of St. Louis
President and CEO of the Federal Reserve Bank of St. Louis James Bullard poses during an interview at the Federal Reserve Bank of St. Louis

By Ann Saphir and Alister Bull

MADISON, Wis./KANSAS CITY, Missouri (Reuters) - Two top Federal Reserve policymakers expressed discomfort on Thursday with the U.S. central bank's easy monetary policy, in comments suggesting Fed Chairman Ben Bernanke may face more dissent this year.

In remarks that stamped her as a hawk on the Fed's policy-setting committee, Kansas City Federal Reserve President Esther George warned that the Fed's near-zero interest-rate policy - aimed at boosting the economy - could spark inflation.

"A prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the 2 percent inflation goal in the future," she said in her most extensive remarks in a year on policy.

"Monetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it," she said in a speech in Kansas City.

That stance is hardly representative of other influential officials at the central bank, including Bernanke and the vice chair, Janet Yellen.

Their view was more closely captured by comments from Narayana Kocherlakota, who noted inflation was forecast to remain below the central bank's 2 percent target for the foreseeable future, even by the Fed's own estimates.

"This forecast suggests that, if anything, monetary policy is currently too tight, not too easy," he said in remarks in Minneapolis.

Last month, the Fed voted to keep up asset purchases at an $85 billion monthly pace to lower borrowing costs and spur hiring. It said it would continue that policy, called quantitative easing, until it saw substantial improvement in the labor market outlook.

U.S. central bankers also pledged to hold interest rates near zero until unemployment falls to 6.5 percent, provided inflation does not threaten to rise above 2.5 percent.

George will cast her first vote this month on monetary policy since taking the helm at the Kansas City Fed in October 2011, while Kocherlakota is not a voter this year.

"The latest remarks from Kansas City Fed's Esther George have cemented the presence of a hawkish dissenter on the FOMC in 2013, with Richmond Fed's (Jeffrey) Lacker passing along the hawkish torch," said Gennadiy Goldberg, U.S. strategist at TD Securities.

Lacker was the lone dissenter on the Fed's policy-setting panel last year.

'VERY AGGRESSIVE POLICY'

St. Louis Fed President James Bullard, who votes as well this year on U.S. monetary policy, also warned about the potential for inflation, although he noted that inflation was so far running under the Fed's 2 percent goal.

"It is a very aggressive policy and it is making me a little bit nervous that we are overcommitting to the easy policy," he told reporters after a speech to the Wisconsin Bankers Association in Madison. "We are taking risk."

As Fed officials mull when to reduce or end the asset buying - some, including Bullard, say that could happen this year - the debate may focus on potential inflation as well as the outlook for the economy.

On the latter front, George was decidedly more downbeat than Bullard, saying she expected the U.S. economy to grow just above 2 percent in 2013, while unemployment falls about another half percentage point.

Bullard sees growth at 3.2 percent this year and next, he said Thursday, and sees the jobless rate dropping to 6.5 percent - the Fed's threshold for rethinking its low-rate policy - by the middle of next year. The U.S. jobless rate in December was 7.8 percent.

Kocherlakota predicts U.S. gross domestic product will expand at an annual pace of 2.5 percent in 2013 and 3 percent next year, estimates that put him on the weak end of Fed policymakers' forecasts.

"This growth will do little in terms of returning the economy to the historical trend," Kocherlakota said in prepared remarks to a Minneapolis Fed event. "Consistent with this slow output growth, I expect unemployment to continue to fall only slowly."

Minutes from the Fed's December meeting suggested George, while definitely on the hawkish end of the central bank's policy views, was not alone.

They said several voting FOMC members were concerned about possible risks to financial stability from the Fed's prolonged stimulus policies.

(Additional reporting by David Bailey and Pedro da Costa; Editing by Peter Cooney)

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