Fed rate lift-off on track but inflation, wages a worry -Lockhart

NAPLES, Fla. (Reuters) - Atlanta Fed President Dennis Lockhart on Friday said he thinks the U.S. economy continues to grow strongly enough to justify an initial interest rate hike later this year, but that weak inflation and wage growth were “worrisome.”

People wait in line to meet a job recruiter at the UJA-Federation Connect to Care job fair in New York March 6, 2013. REUTERS/Shannon Stapleton

Lockhart said the strong U.S. job growth reported on Friday made him confident that the economy “is on a path to a sustainable and desirable state of health.” He projected that the economy would grow 3 percent in 2015 and again in 2016.

“I remain comfortable with the assumption that circumstances will come together around mid-year or a little later ... all possibilities from June on should remain open,” Lockhart said in a speech to business leaders in Naples, Florida, referring to the timing of a Fed rate hike.

But he added that “there are worrisome aspects,” to the current situation, particularly the fact that wage growth has not accelerated even as the unemployment rate has dropped, and that inflation remains so low.

That could indicate that the natural rate of unemployment - a key estimate of the level at which tight labor markets produce wage and price pressures - has slipped to a new low, Lockhart later told reporters.

The matter is under “active discussion” as the Fed tries to determine whether it will be necessary to press unemployment to an unusually low level in order to coax inflation up, Lockhart said.

“Employment progress may be less than meets the eye,” with the unemployment rate pushed lower by millions of workers leaving the labor force, and others stuck in part-time jobs, Lockhart said.

Lockhart said he in particular needs to see more signs that the recent drop in inflation caused by falling energy prices will prove transitory. With some measures of inflation expectations also dropping, Lockhart said he wants to be more confident in his inflation forecast before voting to raise rates.

“Inflation and wages ought to be telling indicators that the gaps are closing,” in the economy, said Lockhart, who has a vote on the Fed’s policy-setting committee. “Their weakness is a concern.”

The comments mark a slight shift in tone for Lockhart, a Fed centrist who has put a premium on ensuring the labor market is fully returned to health. He recently has been upbeat about economic growth, and his speech on Friday came against the backdrop of a jobs report likely to firm the U.S. central bank’s intention to begin raising rates later this year.

But, like other Fed officials, he is waiting for signs that the combination of weak global demand, a strong U.S. dollar, and other factors don’t pull inflation even lower and nip the U.S. recovery.

He said the Fed’s job is particularly difficult now because of the unusual “swirl of variables” - from the potential for an economic meltdown in Europe to falling oil prices.

Reporting by Howard Schneider; Editing by Paul Simao