Fed's Lacker: More policy firming may be needed

CHARLOTTE, North Carolina (Reuters) - The Federal Reserve may have to raise interest rates again if inflation fails to fall, one of its top policy-makers said on Wednesday.

"If inflation does not moderate, I believe additional firming may be needed," Richmond Federal Reserve Bank President Jeffrey Lacker told reporters after a speech to the Charlotte Economics Club.

At the central bank's policy meetings last year, Lacker dissented four times in favor of another rate hike to curb inflation, earning himself a reputation as one of the Fed's most hawkish members. He is not a voter on the U.S. central bank's policy-setting committee in 2007.

He said recent readings on core inflation had not been good and there were doubts over how much it would decline.

"I think there is uncertainty about the degree to which core inflation is likely to moderate this year," he said.

"Moderating growth does not reduce inflation, central banks reduce inflation. In any event, if it came down it would be because of central bank action," he said.

The Fed held interest rates unchanged at 5.25 percent at its meeting last month, but removed an explicit reference to additional policy firming to give itself flexibility in case it needs to cut interest rates in the face of weaker growth.

A steep correction in the once-hot housing market could spread to the rest of the economy. In addition, recent weak monthly durable goods orders have raised concern about the strength of business investment, which might hurt future hiring plans and undermine consumer spending.

Lacker acknowledged there were risks in the housing market but said that, so far, he had seen no evidence these had spilled over into the wider economy.

Interest rate futures markets currently signal that the chances of a rate cut by the end of June are 12 percent and see the likelihood of a cut by end-August at 34 percent.