WRAPUP 1-Fed’s policy divide seen in views of two officials

* Fed may need to consider ending QE2 early -Fisher

* Inflation expectations stable -Lockhart

* Too much talk of exit could mislead -Lockhart

* Dueling views on inflation and exit signal divided Fed

By Chris Baltimore and Pedro Nicolaci da Costa

DALLAS/KNOXVILLE, Tenn., April 8 (Reuters) – Dueling views
on the outlook for inflation and U.S. monetary policy by two
top Federal Reserve officials on Friday underscored divisions
at the central bank as it nears the end of a controversial
stimulus program.

In comments that reflect the majority view at the Fed —
including Chairman Ben Bernanke — Atlanta Fed President Dennis
Lockhart said it was unlikely that recent spikes in commodity
costs will lead to runaway increases in prices.

“With longer-term inflation expectations remaining stable
— and predicting that commodity price growth will stabilize
— my view is that current monetary policy is appropriate,”
Lockhart told the Knoxville Economics Club in Tennessee.

Richard Fisher, president of the Dallas Fed and a
self-proclaimed inflation hawk, took a divergent view, saying
that prolonged easy monetary policy could compound what might
otherwise be transitory inflationary pressures.

Warning of “unpleasant” U.S. inflation data ahead, Fisher
called on the U.S. central bank to stop “spiking the punch
bowl” with more accommodative policy and said the Fed may even
need to end its $600 billion bond-buying program early.

“No amount of further accommodation by the Fed would be
wise,” he told the Society of American Business Editors and
Writers in Dallas. “Indeed, it may well be that we should
consider curtailing what remains of QE2,” he said, referring to
the Fed’s second round of quantitative easing, which is slated
to end in June.

The prices of oil and other commodities have spiked,
sparking inflation fears, hit by both strong demand from
rapidly growing emerging economies and fears of supply
disruptions amid a wave of pro-democracy protests in the Middle
East and North Africa.

U.S. crude has been trading at the highest prices since
September 2008, rising above $110 a barrel, and the average
price of gasoline stands around $3.70 a gallon.

But Lockhart said that while costly fuel is putting a dent
in household budgets, the overall effect on inflation is likely
to be muted.

In part that’s because high unemployment — at 8.8 percent
in March — is keeping wage-driven inflation under wraps, he

Conceding that point as “reasonable,” Fisher — who holds a
voting seat this year on the Fed’s policy-setting panel —
nevertheless said the Fed should not compound the risk of
fueling inflation by adding more liquidity.

Several other hawkish Fed policy makers have pushed noisily
in recent weeks for the central bank to heed signs of incipient
inflation and to begin to think about raising rates, as the
European Central Bank did on Thursday for the first time since

But Bernanke and other core members of the Fed’s
policy-setting Federal Open Market Committee have said the
recovery is too fragile to withdraw support yet.

Given the still-fragile nature of the recovery, Lockhart
said Fed officials should avoid discussing their exit strategy
in too great detail, lest they send the wrong signal to the
public and financial markets about the direction of interest

In response to the deepest recession in generations, the
Fed slashed interest rates to near zero and also committed to
buy more than $2 trillion in government bonds and mortgage

U.S. gross domestic product expanded at an annualized rate
of 3.1 percent the fourth quarter, a rebound which is less
robust than normally seen after a steep downturn.
(Reporting by Pedro Nicolaci da Costa in Knoxville Tenn.,
Chris Baltimore in Dallas, Ann Saphir in Chicago; Editing by
Leslie Adler)

WRAPUP 1-Fed’s policy divide seen in views of two officials