Fed officials: inflation muted, policy on course

By Ann Saphir

HELENA, Montana (Reuters) - The recent surge in oil prices is no prelude to broader price increases that would force the U.S. Federal Reserve to raise interest rates, two top Fed officials said on Thursday.

The comments, from Minneapolis Fed President Narayana Kocherlakota and Fed Board Governor Elizabeth Duke, echoed recent remarks by Fed Chairman Ben Bernanke, adding to expectations the central bank will stay on course with its $600 billion debt-buying program and will not look to reverse its super-easy monetary policy any time soon.

"If we start to see that increase," he added, "that's when you have to start to think about, 'OK, inflationary pressures are building up, we are going to have to raise rates?'."

Recent spikes in energy costs have sparked worries about inflation among some economists and consumers. History suggests the effect of oil prices on inflation will be "transitory", Kocherlakota said. Duke argued that prices are likely to stabilize over the next couple of months.

"It would not be helpful if monetary policy reacted to every move in a volatile price," Duke said in response to questions after a conference in Washington sponsored by the International Factoring Association.

"The rate of inflation over the medium term is a key and important number for us to pay attention to," Duke said. "But when you look at things like gasoline prices, (they) are very volatile."

The Fed last November began buying $600 billion in long-term Treasury debt, its second round of asset purchases to battle the recent recession. The purchases are meant to lower the real cost of borrowing even further than the near-zero short-term interest rates that the Fed has kept in place since December 2008.

Some Fed officials, including Philadelphia Fed President Charles Plosser, have signaled a possible need to raise rates before the end of the year. For more see.

But the core of the Federal Open Market Committee, which sets U.S. monetary policy, does not yet appear convinced.

U.S. wholesale prices rose 5.8 percent in the year to March, the largest gain in a year. But consumer prices, particularly outside food and energy, remains subdued, with wages remaining largely stagnant.

"Core inflation gives a much better sense of where inflation is going in the future," Kocherlakota said, noting it is "very low right now."

The Fed's policy-setting panel, on which both Duke and Kocherlakota have votes, next meets in about two weeks.

The Fed's plan is "at some point" to sell the more than $2 trillion of U.S. Treasury securities and mortgage-backed debt it has accumulated, Kocherlakota said. The U.S. central bank must also eventually raise rates or risk fueling inflation, he said.

He did not suggest any specific time frame or sequence for selling the debt or raising rates, but his comments on low inflation suggest he does not see those actions as imminent.