(Reuters) -Federal Reserve Governor Christopher Waller on Wednesday said the U.S. central bank needs to raise rates aggressively to fight inflation, but not so abruptly as to stress markets, destroy jobs and push the economy into recession.
"I don’t see value in trying to shock the markets; we are not in a Volcker kind of moment," Waller told CNBC in an interview. In the early 1980s, when inflation was last as high as it is now, Fed Chair Paul Volcker jacked up rates as much as four percentage points at a time.
But Volcker, Waller noted, had to battle inflation that had been building for six or seven years; the current Fed is dealing with a surge in inflation that only began early last year.
"Right now our main concern is getting these prices down and we can do that without causing a recession," Waller said, noting that he supports raising interest rates by a half-a-percentage point in May and "possibly more" in June and July.
"We don’t need to be shocking anything just to cause a shock...if inflation doesn’t cool off, we’ll keep going; we’ll do what it takes to get inflation back down" he said. "But we can do that in an orderly way without causing a lot of financial market stress."
The Fed raised interest rates last month for the first time in three years, but uncertainty stemming from Russia's invasion of Ukraine kept it from raising rates more than a quarter-of-a-percentage point.
Data since then - including a report on Tuesday showing consumer prices rose 8.5% in March, the biggest yearly rise since late 1981 - supports bigger rate hikes ahead, Waller said.
"I think we want to get to above neutral certainly by the later half of this year, and get closer to neutral as soon as possible," Waller said, noting that while inflation has "pretty much" peaked, the Fed still needs to tighten policy to reduce demand and take pressure off of prices.
Traders continue to bet the Fed will raise interest rates by a half-point at both its May and June meetings, but in recent days have retreated from bets on a third half-point hike this year.
Fed Governor Lael Brainard on Tuesday signaled she was heartened by a moderation in core inflation in March that could point to some cooling ahead, even as rising food and gas prices drove overall consumer prices up 8.5%.
Rate futures prices last week were pricing in about a 75% chance the Fed's policy rate would end the year in the range of 2.5% to 2.75%.
On Wednesday traders were betting that year-end range was only slightly more likely than ending 2022 in a range of 2.25% to 2.5%, around the rate that most Fed policymakers see as neutral and that could be achieved with two half-point rate hikes in coming meetings.
Waller's remarks stood in contrast to his former boss St. Louis Fed President James Bullard, who supports raising rates to 3.5% by the end of the year and told the Financial Times that it is "fantasy" to think that inflation can be vanquished with more modest moves.
To reach Bullard's target would require half-point hikes at all six remaining Fed meetings this year.