Fed's Kaplan says U.S. 'pretty darn close' to fully employed

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque

BOSTON (Reuters) - Dallas Federal Reserve Bank President Robert Kaplan on Thursday reiterated his view that the Fed should raise interest rates soon because the economy is getting “pretty darn close” to full employment and inflation is starting to rise.

The Fed may need to defer a rate hike until after its June meeting, Kaplan suggested at an event at Boston College, because Britain’s vote on whether to leave the European Union, taking place a week after the Fed meets, has the potential to spark a currency selloff and other unanticipated consequences.

And rate hikes, he told reporters afterward, need to be made slowly, gradually and patiently, as a precipitous increase could catapult the economy back into recession.

But Kaplan reiterated that he would advocate for a rate hike in the “near future,” making him the latest in a parade of Fed officials flagging mid-summer as a reasonable time to raise rates. Fed Chair Janet Yellen will speak on June 6, the last day before policymakers enter a quiet period leading up to their meeting on June 14-15.

Despite slow reported growth in the first quarter, the U.S. economy will likely grow 2 percent this year, pushing unemployment down further below the 5 percent reported in April, Kaplan predicted. The U.S. government will release job figures for May on Friday.

Meanwhile inflation, which has long under-run the Fed’s 2-percent target, has begun to tick up in recent months.

The Fed pinned interest rates near zero for seven years until last December, when it raised them by a quarter of a percentage point. Keeping rates this low for so long distorts investment and hiring decisions, Kaplan said.

“There is a cost to having rates this low,” Kaplan said. “There’s a natural inclination to take more risks.”

Reporting by Tim McLaughlin, writing by Ann Saphir; Editing by Chizu Nomiyama