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.

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.

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.

(Reporting by Ann Saphir in St. Cloud and Pedro Nicolaci da Costa in Tallahassee, Fla; Editing by Padraic Cassidy and Dan Grebler)

Federal reserve Ben Bernanke Crude oil Florida