By Howard Schneider

WASHINGTON Federal Reserve Governor and vice chair nominee Philip Jefferson said progress on inflation may be slowing but said it was also too early in the policy tightening process to judge the full impact of the rapid rate increases approved by the central bank so far.

Inflation "is still too high, and by some measures progress has been slowing," Jefferson said in comments prepared for delivery to the National Association of Insurance Commissioners.

"Outside of energy and food, the progress on inflation remains a challenge," and in particular there have been "no signs of significant decline" in the broad set of services beyond housing, a large part of the economy where prices have been rising fast, Jefferson said.

But he said also that the economy has "slowed considerably" this year. While his baseline forecast does not include recession, he said he expects job growth to slow and the unemployment rate possibly rise over time.

And there may be more impact still to come from Fed rate hikes to date, as well as possible "downside risks" from recent stress in the banking industry, he said.

Jefferson did not indicate a preference for holding rates steady or proceeding with further rate increases at the Fed's June meeting, when a rate pause is widely expected. He said, however, he would "consider all these factors" in the context of jobs and inflation data still to be released before the June 13-14 meeting.

"History shows that monetary policy works with long and variable lags, and that a year is not a long enough

period for demand to feel the full effect of higher interest rates," Jefferson said.

Though he said evidence so far points to only a "modest incremental tightening of lending conditions" as a result of recent banking industry stress, the impact of that on household and business spending was hard to predict.

"There is considerable uncertainty about the magnitude of the impact on household spending and business investment, and this uncertainty complicates economic outlook forecasts," Jefferson said.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama)