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Fed's Waller sees no sign of 'quick' decline in inflation

FILE PHOTO: An eagle tops the U.S. Federal Reserve building's facade in Washington

By Howard Schneider

WASHINGTON (Reuters) - Inflation seems poised to continue slowing this year but the U.S. central bank's battle to reach its 2% target "might be a long fight" with monetary policy kept tighter for longer than anticipated, Federal Reserve Governor Christopher Waller said on Wednesday.

"There are signs that food, energy, and shelter prices will moderate this year," Waller said in remarks prepared for delivery at an Arkansas State University conference, and that the Fed's rapid increases in interest rates had begun "to pay off."

"But I'm not seeing signals of ... quick decline in the economic data, and I am prepared for a longer fight," Waller said. The surprisingly strong gain of 517,000 jobs in January showed the economy was holding up well, for example, Waller said, but also meant that "labor income will also be robust and buoy consumer spending, which could maintain upward pressure on inflation in the months ahead."

Though wage growth has slowed, the decline is "not enough," Waller said. "The Fed will need to keep a tight stance of monetary policy for some time."

Waller did not say in his prepared remarks how much higher the Fed may need to raise its benchmark overnight interest rate to reach a level adequate to return inflation to the Fed's 2% target. As of December, the Fed's preferred measure of inflation was increasing at a 5% annual rate.

Fed projections released in December showed policymakers expected the federal funds rate to rise to a peak of between 5.00% and 5.25% this year from the current 4.50%-4.75% range. Waller has been an advocate of more aggressive hikes in rates, but supported the central bank's decision to begin raising them in quarter-percentage-point increments as of its meeting earlier this month.

"Though we have made progress reducing inflation, I want to be clear today that the job is not done," Waller said.

(Reporting by Howard Schneider; Editing by Paul Simao)