Fed's Stern: Economy sluggish, inflation to abate

By Ros Krasny

THREE FORKS, Montana, Aug 14 (Reuters) - Minneapolis Federal Reserve Bank President Gary Stern said on Thursday the United States faces rising unemployment and modest economic growth "for a time" but that inflation should abate.

"Given the headwinds associated with the financial shock, the economy appears likely to be restrained until credit conditions improve," Stern said in remarks prepared for a Minneapolis Fed event in Three Forks, Montana.

A copy of his remarks was made available in advance.

Credit markets will "inevitably" pick up, but for now "a variety of potential borrowers are finding funding more difficult and expensive to obtain," Stern said.

Meanwhile, the contraction in residential housing continues and the run-up in energy and other commodity prices "has taken a toll on consumer discretionary spending," he added.

A few weeks ago Stern sounded keen for the Fed to start raising interest rates before too long to head off an inflation threat.

On Thursday, Stern, the Fed's current longest-serving president and a voting member of the policy-setting Federal Open Market Committee in 2008, seemed more at ease with the outlook for prices but did not specifically address the interest rate outlook.

"A diminution of inflation, absent a resurgence in energy and other commodity prices" is likely from this point, he said.