Markets underestimating pace of Fed rate hikes - Lacker

NEWARK, Del. (Reuters) - The Federal Reserve will likely have to raise interest rates more rapidly than financial markets currently expect given that any new policies by the Trump administration, while uncertain, will force the Fed's hand, a hawkish central banker said on Tuesday.

Since the election of Donald Trump as U.S. president, markets have rallied on hopes of fiscal stimulus. Yet while forecasts from Fed officials suggest roughly three rate hikes could come this year, futures markets see only two, based on probabilities.

"Rates need to rise more briskly than markets now seem to expect," Richmond Fed President Jeffrey Lacker, a long-time proponent of tighter monetary policy who is retiring in September, said in prepared remarks.

"The elevated uncertainty now surrounding fiscal policy, particularly the potential for substantial fiscal stimulus, suggests that our next increase should come sooner rather than later in order to reduce the risks associated with having to raise rates more rapidly later on," he added.

Lacker, who does not vote on policy this year under a rotation, added there was "considerable uncertainty" about the effect that Trump's fiscal polices would have on the U.S. economy, which is roughly at full employment.

Lacker, speaking as Fed Chair Janet Yellen testified before a Senate panel, also waded into the political debate over whether Congress should mandate the central bank adhere to a single "policy rule" in setting rates.

Like his colleagues at the Fed he opposed this effort by Republican lawmakers, saying, "such an approach is likely to be too inflexible and limit warranted responses to unanticipated developments."

(Reporting by Jonathan Spicer; Editing by Meredith Mazzilli)