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CNBC Exclusive: Fed's Lacker Says Economy Strong, Inflation Too High

In an exclusive interview on CNBC, Richmond Federal Reserve President Jeffrey Lacker said he thinks economic growth will rebound by the end of the year but that inflation is still too high.

“Business investments hit a soft spot in the fourth quarter, but all signs are that the fundamentals are good and it is going to be a source of strength going forward," Lacker told CNBC's Steve Liesman. "Consumer spending is in good shape as well, so I am expecting a return to trend growth by the end of the year.”

However, Lacker, one of the Fed's toughest inflation hawks, said he'd like to see the inflation rate come down a bit more. Although he is not a voting member of the Fed this year, Lacker dissented four times last year from the majority at the Fed who wanted to keep interest rates unchanged instead of raising them.

“I don’t think the moderation we’ve seen is statistically significant,” he said. “The core inflation has been fluctuating between 2% and 2.5% for two years now and before that from 1996 through 2003, core inflation was between 1% and 2%. We need to get back to containing core inflation between 1% and 2%.”

Still, the Fed official believes the economy and consumers can handle higher gasoline prices. He said his major concern is that the public has become “conditioned” to the idea that higher oil and gasoline prices equal higher inflation.

“That does not have to be true," he said. "It is a matter of relative price changes that go on all the time in a healthy economy. Lacker said he was worried that rising gasoline prices will prompt an uptick in inflation expectations.

On the housing slump, Lacker told Liesman that the data was more choppy than usual during the winter months.

“I think we hit the low point (in the economy) in the first quarter," he said. "Housing was obviously a weak spot and it has been difficult to get a read on whether demand bottomed out.”

Lacker added that the housing market varies widely from region to region, but overall there are a lot of new home inventories waiting to be sold.

“It is not clear whether housing demand has hit bottom or not," he said. "I think it will be a couple more months until we get more data on the spring selling season and we know whether demand has bottomed out."

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