(Adds direct quote, market reaction)
By Svea Herbst-Bayliss
QUINCY, Mass., Sept 9 The Federal Reserve, long
hesitant to raise U.S. interest rates, increasingly faces risks
if it waits too much longer so a gradual policy tightening is
likely appropriate, a top Fed official said on Friday in
comments that lifted the dollar and hit stocks.
In another sign that a U.S. rate hike is approaching, Boston
Fed President Eric Rosengren said "risks to the forecast are
becoming increasingly two-sided." That means that while a
slowdown overseas remains a concern, the U.S. economy has proven
resilient and could even overheat if Fed policy remains
unchanged for too much longer, he said.
Rosengren, an historically dovish Fed policymaker who has
become more confident about hiking rates, did not say whether he
expects to back a rate hike this month or even this year.
But he cited Britain's vote in June to leave the
European Union as an example of U.S. resistance to shocks from
"There are also longer-term risks from significantly
overshooting the U.S. economy's growth," said Rosengren, a voter
on the Fed's policy committee this year.
A "gradual tightening is appropriate" in order to maintain
full employment and to avoid overheating the world's largest
economy, he told the South Shore Chamber of Commerce in Quincy,
Massachusetts. "A reasonable case can be made for continuing to
pursue a gradual normalization of monetary policy."
The comments helped boost the dollar and short-term Treasury
yields, weighed on stock prices, and they appeared to help lift
the odds of a September rate hike to about 30 percent, from
about 20 percent on Thursday.
The Fed raised rates from near zero last December - the
first rate hike in nearly a decade - but has since stood pat
given an economic slump at home and volatile markets overseas.
Investors and economists see better odds of a hike at a Fed
policy meeting in December, after a U.S. election.
Rosengren, who stressed the Fed was not about to raise rates
"too rapidly," appeared to fall in line with Fed Chair Janet
Yellen's message last month that the case was "strengthening" to
The "modest" wage pressures so far this year mean the labor
market is tightening and could well exceed "full employment"
next year, Rosengren said. For the rest of this year, U.S. GDP
growth will likely rebound and run above a 2-percent rate over
the next two quarters, he added.
(Reporting by Svea Herbst-Bayliss; Writing by Jonathan Spicer;
Editing by Chizu Nomiyama)