Fed's Lacker Says Rates Might Need to Rise A Lot, Case For Hike Strong

Richmond Federal Reserve President Jeffrey Lacker on Tuesday said there was a strong case for raising interest rates, arguing that borrowing costs might need to rise significantly to keep inflation under control.

The Fed last raised its benchmark federal funds rate in December and Lacker, who is not a voting member of the Fed's rate-setting committee this year but participates in its discussions, has been pressing in recent months for further hikes.

"Pre-emptive increases in the federal funds rate are likely to play a critical role in maintaining the stability of inflation," Lacker told a conference on the economic outlook.

The Fed's current target range for the rate is between 0.25 percent and 0.5 percent and most policymakers expect to raise the range by a quarter point before the end of 2016.

But the Fed is also divided, with several voting members arguing for a more cautious approach to rate increases. Prices for fed funds futures suggest investors see just higher than even odds the Fed will raise rates by the end of the year.

Lacker argued economic history suggests the fed funds rate might need to be higher than 1.5 percent at present. He warned that keeping rates too low could lead to a rise in inflation and aggressive rate hikes, potentially causing a recession.

"This is the basis for the strong case I have articulated for raising our interest rate above its current low level," he said.

(Reporting by Jason Lange; Editing by Chizu Nomiyama)