“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic” U.S. economy, Fisher said during a Wednesday speech in San Francisco.

In a financial commentary titled, “With Oil Speculators Blitzing, the Fed Needs to Call an Interest-Rate Reverse Play,” Money Morning Contributing Editor Martin Hutchinson predicted that escalating inflationary pressures will force central bank policymakers to start increasing the benchmark Federal Funds rate – perhaps as soon as the two-day Federal Open Market Committee (FOMC) meeting that’s scheduled for June 24-25.

Although the article was datelined Wednesday, Money Morning’s articles are typically posted to the Web site the night before. And Hutchinson actually filed the article on May 21 – a full week before Fisher made his comments. Even before that, however, Hutchinson has repeatedly warned that inflation was becoming problematic: Back in early April, he even predicted that gold prices are headed for the $1,500-an-ounce level – again, due to inflationary pressures [Check out several of Hutchinson’s recent inflation-related research reports - one detailing profit plays stemming from higher oil prices, and the other looking at gold plays. Both reports are free of charge].

A move to boost interest rates would be a major story as well as a major turnabout for the U.S. central bank. After all, for nearly eight months the Federal Reserve has been engaged in one of the most aggressive rate-cutting campaigns in its history, having slashed short-term interest rates from the 5.25% level in mid-September down to 2.0% today.

The Fed Funds rate is the interest rate Fed-member banks charge for overnight loans to other institutions needing the cash to meet reserve requirements. Changes in that rate quickly affect borrowing costs throughout the U.S. economy, since commercial lenders are quick to adjust the so-called “Prime Rate” – and rates on other types of loans – in lockstep with changes in the Fed Funds rate.

Hutchinson, a longtime international banker and an expert on emerging-markets finance, said that as soon as he read the minutes from the April 29-30 FOMC meeting, he knew a near-term rate increase was likely. The two key reasons:

• The central bank had reduced its 2008 economic growth outlook from the range of 1.3% to 2.0% it issued back in January down to a new, lower 2008 growth estimate of 0.3% to 1.2%.
• At the same time, FOMC policymakers boosted their estimates for inflation – excluding food and energy prices – to a range of 2.2% to 2.4% this year, up from an earlier range of 2.0% to 2.2%.

According to Hutchinson, that double-whammy of lower growth and higher inflation leads to only one conclusion: Interest rates must head higher.

“Obviously, the Fed’s outlook on growth and inflation both changed,” Hutchinson said in a telephone interview from his Washington-area home yesterday. “There’s a lot of straw in the wind at this point.”

The April FOMC meeting minutes were released May 21; Hutchinson wrote his analysis and made his predictions later that same day. Prior to the release of the Fed minutes, there was almost no marketplace expectation of a near-term increase in interest rates.

Over the past few weeks, several other Fed bank presidents – including Thomas Hoenig of Kansas City and Gary Stern of Minneapolis – have displayed an escalating concern about spiraling pricing pressures. But Fisher, 59, is the only FOMC policymaker to “dissent” three times from decisions to lower the Fed Funds rate, Bloomberg News reported.