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Fed's Moskow Still Sees Risk of Inflation

The risk of high inflation still outstrips risks of lower U.S. growth, and as a result more interest rate increases could be needed, Chicago Federal Reserve President Michael Moskow said on Friday.

"I see the economy with some solid underlying momentum behind it and inflation running too high," Moskow said in a speech to the University Club of Chicago.

"My assessment is that the risk of inflation remaining too high is greater than the risk of growth falling too low. Thus, some additional firming of policy may yet be necessary."

Although inflation risks have lessened in recent months and readings on core inflation have been somewhat better, "it is much too early to say that inflation is no longer a concern,"
Moskow said.

Moskow is a voting member of the interest rate-setting Federal Open Market Committee this year but has announced his retirement at the end of August.

The policy-maker, one of the Fed's more hawkish in recent years, said his preference was for core inflation to fall toward the center of his target zone of 1% to 2%.

In 2006 the core personal consumption expenditures, price index rose at a 2.2% pace.

"If actual inflation does not show clear enough signs of returning to the center of the range I associate with price stability, there is a danger that expectations of inflation could run too high, which would likely be a self-fulfilling prophesy," he said.

The FOMC has left its benchmark federal funds rate at 5.25% for five consecutive meetings. Financial markets look for another steady outcome at the March policy meeting, with a
slim chance of a rate cut by June but a strong chance of a cut by the end of the third quarter.