Fed officials see U.S. recovery taking hold

By Kim Palmer and Sakari Suoninen

AKRON, Ohio/FRANKFURT (Reuters) - The U.S. recovery is gaining traction, two top Federal Reserve officials said on Tuesday, though they differed on the risks of inflation in the U.S. economy.

Cleveland Fed President Sandra Pianalto said she expects the U.S. recovery to continue at a moderate pace, with rising commodity and energy prices only temporarily putting pressure on broader consumer prices.

"The recovery seems to have established a firmer footing. I am seeing clearer signs of a virtuous cycle of growth," Pianalto said in a speech at the University of Akron.

Dallas Fed President Richard Fisher, speaking in Frankfurt, Germany, said the U.S. recovery was gathering momentum and needs no further Fed support.

"The Fed has done enough, if not too much, and we should do no more. In my opinion no further accommodation is necessary after June," Fisher said.

The U.S. approach contrasts with a growing likelihood of rate hikes by the European Central Bank and the Bank of England.

Pianalto, whose views tend to be aligned with the center of the Fed's policy setting committee, said she does not see rising energy prices associated with political unrest in the Middle East and North Africa spilling over into broader inflation. But she called the oil price rise a "key risk" to the U.S. economy that bears monitoring.

"If the spike in oil prices is sustained, it will potentially slow the pace of GDP growth," she said. "Even if the growth consequences turn out to be relatively small, a sustained increase in the price of oil could cause some people to worry about higher inflation."

Pianalto said she does not think rising food and energy prices will have a sustained impact on the inflation rate. She expects inflation to rise only gradually to 2 percent by 2013.

"To cause a lasting rise in inflation, the increases in food or energy prices have to be large enough and persist long enough that they spill over and cause sustained increases in a wide array of other consumer prices. At this point, there is no evidence of broad spillover," she said.

Fisher, one of the more hawkish Fed officials on inflation, warned there were signs that the speculative style of trading that had helped fuel the financial crisis was beginning to resurface.

"We are seeing speculative activity that may be exacerbating (price rises in) key commodities such as oil," he said.

Fisher said it was too early to gauge the impact that Japan's earthquake and nuclear crisis and the rising tensions in the Middle East would have on the U.S. economy.

"There are different views being expressed, but we are central bankers. We have to think about the long term. ... It is way too early to tell," said Fisher, who is a voter on monetary policy this year.

Beyond disruptions to global supply chains (click here for a special report: http://r.reuters.com/muk68r) some business leaders worry that Japan's disasters could affect consumer confidence in the United States.

"I wouldn't be surprised if this fed into U.S. consumer spending," said James Tisch, a member of the New York Fed's board of director who is the chief executive of conglomerate Loews Corp. Tisch is among directors who provide anecdotal input that helps inform Fed policy.

"I think it is part of the uncertainty people are feeling. There is a sense that nothing is safe and secure," Tisch said in an interview.

Pianalto, who is not a voter on monetary policy this year, expects economic growth of slightly above 3 percent a year, with rising incomes and profits supporting retail sales and business demand. Housing, though, continues to be a drag on growth, she said.

"Many homes remain in the foreclosure pipeline, and we are looking at well over a year before the number of bank-owned properties begins to decline significantly," she said.

Fisher reiterated his concern about the U.S. deficit, and stressed the importance of debt-cutting measures.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent. The question is when," he said.

"The short-term negotiations are very important. I look at this as a tipping point."

(Additional reporting by Marc Jones, writing by Kristina Cooke; Editing by Leslie Adler)