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By Pedro Nicolaci da Costa and Burton Frierson

NEW YORK, April 14 (Reuters) - The U.S. Federal Reserve is prepared to play a role in repairing fractured financial markets, but recovery will take time and be uneven, Fed Governor Kevin Warsh said on Monday.

"While the adjustment process by financial intermediaries is showing signs of promise, the healing process is not likely to be linear," Warsh told the New York University School of Law. "Given the fragility evidenced in financial markets and the toll it is taking on real activity, the Federal Reserve agreed to take center stage."

The Fed's interest rate cuts and liquidity steps to date have been aimed at limiting further damage to the economy from the credit crisis, he said. While the economy faces downside risks, the U.S. central bank is also concerned about inflation and is monitoring prices closely, Wash said.

"Increases in food and energy prices have pushed up overall consumer prices and are putting upward pressure on core inflation and inflation expectations," he said.

The central bank has slashed interest rates by three percentage points since mid-September and provided hundreds of billions of dollars in liquidity to keep bank credit flowing. It is expected to reduce rates again when its policy committee meets on April 29-30.

But even as the Fed has raced to restore smooth market functioning and thaw frozen credit markets, oil and other commodity prices have pushed consumer prices higher, leading to a worrisome rise in inflation in recent months.

With evidence that markets are beginning to build persistenty higher rates of inflation into forecasts, the Fed is limited in how much more it can lower interest rates, or how long it can keep interest rates low, without fueling inflationary pressures.