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Fed's Lacker says there still a case for further rate hikes

[BALTIMORE] Richmond Federal Reserve President Jeffrey Lacker said on Wednesday there is still a case for raising interest rates further, a sign the central bank could have a live debate next month over whether to raise interest rates.

Following nearly two months of falling global equity prices and mounting concerns over a global economic slowdown, investors see almost no chance the Fed will raise rates at its March 15-16 policy meeting.

Lacker did not comment on the timing of future hikes but he said he saw no evidence a US recession was imminent and made clear he thought the Fed needs to raise rates to keep future inflation from rising too high.

He argued that estimates of the economy's so-called natural real rate of interest, the rate when economists think there will be normal economic growth rates and stable inflation, is at or just above zero.

"This perspective would bolster the case for raising the federal funds rate target," Lacker, who is not a voting member on the Fed's rate-setting committee this year but participates in its discussions, told a university gathering in Baltimore.

Lacker's speech followed comments by Kansas City Fed President Esther George on Tuesday that the Fed should consider raising rates in March. George has a vote on the Fed's policy committee this year.

George and Lacker are among the Fed policymakers who most urge an active fight against future high inflation, or "hawks"in central banking parlance.

In his speech, Lacker argued against the view that inflation is expected to fall well short of the Fed's 2 per cent target in coming years.

Many economists and investors think low inflation expectations and heightened financial market volatility will lead the Fed to leave interest rates unchanged in March and possibly for the rest of this year, despite the signal policymakers gave in December that they could hike four times in 2016.

But Lacker said that economic analysis suggests inflation could average 1.9 per cent in the period between 5 years and 10 years from the present.

Fed policymakers appeared divided at their last policy meeting in January when they held its benchmark rate at between 0.25 per cent and 0.5 per cent but discussed hiking rates as well as changing their views on the future path of policy.