WRAPUP 3-Fed officials argue easy-money policy should stay

* Fed should complete current bond buying program-Lockhart

* Fed must be vigilant on any uptick in inflation-Lockhart

* No reason not to complete current bond buys-Kocherlakota

* Kocherlakota- No extension to QE2 unless inflation falls
(Adds Kocherlakota comments)

By Ann Saphir

ST. CLOUD, Minn., March 3 (Reuters) – The U.S. Federal
Reserve is right to carry on with its cheap money policy to
fight high unemployment, but policymakers must stay on guard
for signs of inflation, two top Fed officials said on
Thursday.

Atlanta Fed President Dennis Lockhart, speaking in
Tallahassee, Fla., said the Fed should stay “vigilant” for any
rise in inflation while completing its $600 billion bond-buying
program. Minneapolis Fed President Narayana Kocherlakota, in
St. Cloud, Minn., said he sees no reason the Fed should not
complete the program, but added that it would take a further
decline in inflation to support further stimulus.

Political upheaval in North Africa and the Middle East has
driven oil prices up sharply, with U.S. crude oil futures
surpassing $100 a barrel this week. That has sparked fears of a
broader rise in prices, particularly given the Fed’s
unprecedented stimulus to the economy, including $2.3 billion
worth of government and mortgage bond purchases due to be
completed in June.

“We must remain vigilant in looking for any uptick in
broad-based inflation that could un-anchor long-term
expectations,” Lockhart told the Economic Club of Florida.

So far, he said, inflation remains significantly below the
Fed’s presumed comfort range of 2.0 percent or less, and the
recovery is too sluggish to warrant curtailing the current bond
purchases.

Some Fed officials have argued that recent stronger
economic data means the Fed should consider cutting short its
current $600 billion bond-buying program.

Both Lockhart and Kocherlakota disagreed.

“The best course of action is to play out the program as
originally planned,” Lockhart told reporters after his speech.
“I don’t think the situation yet exists that would justify
cutting the program off or reducing it,” he said.

“It is very hard to think of conditions that would qualify”
as reasons to cut the bond-buying program short, Kocherlakota
told reporters after his speech at St. Cloud State University.

More than anything, he said, Fed officials need to watch
inflation. If core inflation by June is lower than the 0.5
percent level it registered in the second half of last year, he
said, the Fed should consider extending the program.

If it rises, he said, the Fed may have to start tightening
monetary policy even while unemployment remains high by
historical standards.

Keeping the Fed’s current bond-buying program on track
reflects the core view of the policy-setting committee, which
next meets on March 15.

Fed Chairman Ben Bernanke on Wednesday said that a failure
to reduce unemployment could imperil the recovery, suggesting
he is not inclined to shift policy any time soon. For details
see [ID:nN01144605]

European Central Bank President Jean-Claude Trichet
signaled he may raise interest rates next month to head off
rising inflation. That was far earlier than markets expected,
and puts the ECB in the pole position to raise rates well
before the Fed and even the Bank of England. [ID:nLDE7220KJ]
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic: U.S. Federal Reserve balance sheet:

http://link.reuters.com/buf92k

INSTANTVIEW-US weekly jobless [ID:nN03169632]

Graphic-US jobless claims:

http://r.reuters.com/ryx38r

INSTANTVIEW-ISM service sector PMI [ID:nLDE7221ST]

Graphic-US services sector

http://r.reuters.com/rez38r
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

UNEMPLOYMENT

Economists polled by Reuters expect the U.S. jobless rate
to rise to 9.1 percent in February from 9.0 percent in January,
following two months of sharp declines. They also forecast
185,000 new jobs were created, up sharply from January’s paltry
36,000. The Labor Department will release its closely watched
employment report on Friday.

Lockhart flagged the problem of long-term unemployment as
one of the greatest challenges facing the U.S. economy.

“The recovery has brought little relief to the labor
market,” he said. He noted only part of the recent spike in
joblessness was caused by structural factors that are beyond
the reach of policymakers.

“Monetary policy can contribute, but it shouldn’t be
expected to eliminate all the factors holding back employment
growth,” Lockhart said.

Still, he saw some signs of hope in the data.

“The pace of job growth is picking up. Also, the large
volume of announced lay-offs … has declined,” he said.

Applications for first-time jobless benefits fell in the
latest week to the lowest level in 2-1/2 years, adding further
evidence of an employment sector that is beginning to heal,
albeit very slowly. [ID:nN02222564]
(Reporting by Ann Saphir in St. Cloud and Pedro Nicolaci da
Costa in Tallahassee, Fla; Editing by Padraic Cassidy and Dan
Grebler)