The Federal Reserve Bank should continue to flood the economy with cheap money to fight high unemployment, but policymakers must stay on watch for signs of inflation, two top Fed officials said on Thursday.

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 inflation, 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 unanchor long-term expectations, Atlanta Fed President Dennis 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 lower.

At the same time, unemployment remains far too high and the economic recovery still needs plenty of help from the Fed, Lockhart said.

Minneapolis Fed President Narayana Kocherlakota, speaking at the aptly named Winter Institute economics conference at St. Cloud State University, agreed.

It is appropriate for monetary policy to be highly accommodative, Kocherlakota said.

As long as inflation continues to decline, monetary policy will be an effective tool to fight unemployment, said Kocherlakota. But Fed officials must be vigilant on any changes to that equation.

By responding to the rate of inflation, responding to changes in the rate of inflation, that's the best way for monetary policy to be helping the economy, he said. Kocherlakota said he would be keeping an eagle eye on core inflation.

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

But officials' comments today reflect 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 bring down 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 hike rates well before the U.S. and even the Bank of England.

UNEMPLOYMENT

Economists polled by Reuters expect the jobless rate to rise to 9.1 percent in February from 9.0 percent, following two months of sharp declines. They also believe 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 country.

The recovery has brought little relief to the labor market, Lockhart said. He said only part of the recent spike in joblessness was due to 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 layoffs ... has declined, he said.

Applications for first-time jobless benefits fell in the latest week to their 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)

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