Inflation-wary Fed looks ahead to rate increases

By Ros Krasny

SAN FRANCISCO (Reuters) - Two Federal Reserve policy makers warned on Wednesday that interest rate increases might be needed before too long to curb inflation, even as the United States struggles with a weak economy.

The remarks solidified expectations that the Federal Open Market Committee has ended an aggressive rate-cutting campaign and could start to reverse its policy course late this year.

Dallas Fed President Richard Fisher and Minneapolis Fed President Gary Stern, both voting members of the FOMC in 2008, said they are keeping a close eye on inflation expectations being dialled into financial markets.

"If inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, Fisher said in San Francisco.

Rate increases could be made "even in the face of an anaemic economic scenario," Fisher told the Commonwealth Club of California, adding that he did not expect a recession.

Fisher said it would be "unacceptable" for the Fed to be viewed as resigned to higher levels of inflation.

That is a particular risk as the lagged impact of the Fed's interest rate cuts starts to kick in, boosting economic growth at a time inflation is already "too high" and commodity prices are being pushed up by strong global demand.

Earlier, Stern vowed that the Fed would act in an "appropriate and timely" way.