Aug. 19 (Bloomberg) -- Higher interest rates may be needed to bring down inflation even before growth and financial markets return to normal, Federal Reserve Bank of Richmond President Jeffrey Lacker said.

``It is important to withdraw this monetary policy stimulus in a timely way,'' Lacker said today in a Bloomberg Television interview. ``That may require us to withdraw before we are certain all of the weakness is behind us and before we are completely certain that financial markets are as tranquil as we would like to see.''

U.S. consumer prices rose at the fastest pace in 17 years, limiting the Fed's leeway to cut interest rates and revive faltering economic growth. Prices paid to U.S. producers in July increased double the amount economists projected, a Labor Department report showed today.

Central bank policy makers signaled two weeks ago that falling employment and persistent financial market turmoil would delay any increase in borrowing costs.

``I certainly don't think the federal funds rate should be any lower given where we are now,'' said Lacker. `Monetary policy is very stimulative right now.''

``We are still in a fairly risky situation'' on the inflation front, he added.

Lacker said Aug. 12 that even if energy prices moderate, he's ``still concerned'' about the ``overall pattern'' of rising prices.

Fisher's Dissent

Other Fed bank presidents have voiced concerns about inflation. Dallas Fed President Richard Fisher at the Aug. 5 meeting of the Federal Open Market Committee dissented for a fifth time this year, preferring an increase in interest rates.

The Fed can raise rates without impeding a credit market recovery and such a rate increase may occur sooner than many people expect, Fisher said today. The U.S. may face a ``lingering inflationary fever'' as food and energy costs are passed on by producers, he said.

Atlanta Fed President Dennis Lockhart said in an Aug. 15 interview that ``the reasonable policy debate will be around holding versus raising rates.'' If prices don't moderate as he expects, he would back an ``earlier'' increase in rates.

Philadelphia Fed President Charles Plosser said July 23 that policy makers should act before inflation expectations become ``unhinged.''

Lacker, 52, heads a district that is home to Bank of America Corp. and Wachovia Corp., two of the four biggest U.S. banks. A former head of research at the Richmond Fed, he alone dissented in rate votes at the Fed in late 2006, advocating higher rates to stem inflation. He votes again in 2009.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Kathleen Hays in Seattle at khays$@bloomberg.net

Last Updated: August 19, 2008 14:57 EDT