Fed's Waller: if data stays hot, policy rate should go above 5.1%-5.4%

By Ann Saphir

(Reuters) - A string of "hot" data may force the U.S. central bank to raise rates higher than the 5.1%-5.4% range projected by the majority of Federal Reserve policymakers as recently as December, Fed Governor Christopher Waller said on Thursday

Recent economic data showing an "excessively" strong labor market, robust consumer demand and stubbornly persistent price pressures calls into question the extent of progress the U.S. central bank has made on its inflation fight, Waller said.

If reports due out in coming weeks show hiring has slowed and inflation resumes its drop after an unexpected acceleration in January, "I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1 and 5.4%," he said in remarks prepared for delivery to the Mid-Size Bank Coalition of America

But, he added, "if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data."

After tightening policy aggressively last year to fight 40-year-high inflation, the Fed slowed the pace of interest-rate hikes in December and again last month, when it increased the benchmark by a quarter of a percentage point to the 4.50%-4.75% range.

At the time Fed Chair Jerome Powell cited recent economic data as evidence that a "disinflationary" trend had begun, suggesting the policy rate was nearing a restrictive-enough level.

But in January, inflation by the Fed's preferred gauge, the Personal Consumption Expenditures price index, rose 5.4% from a year earlier, worse than the 5.3% it notched in December.

The Fed targets a 2% inflation rate.

That data, coupled with a government report showing employers added more than a half million jobs in January, has prompted many analysts to expect a higher stopping point for rates. Fed policymakers will publish revised projections for the rate path at their upcoming meeting on March 20-21.

Traders have also been pricing in a more aggressive policy path, with futures contracts tied to the Fed's policy path now reflecting expectations for another full percentage point of rate hikes by September, bringing the policy rate to a 5.5%-5.75% range.

Waller signaled he was open to the possibility that the apparent recent stall in progress on inflation was a "bump" in an otherwise welcome trend downward.

"It could be that progress has stalled, or it is possible that the numbers released last month were a blip, perhaps associated with unusually favorable weather, and that forthcoming data will show that economic activity and inflation resumed their decline," he said.

Nonetheless, he said, "the fight to bring inflation down to our 2% target will be slower and longer than many had expected just a month or two ago."

(Reporting by Ann Saphir and Dan Burns; Editing by Andrea Ricci)