Powell, keeping cards close, says Fed to gradually hike rates

By Jonathan Spicer

NEW YORK (Reuters) - The Federal Reserve is set to gradually raise interest rates as long as the U.S. economy continues on its current path, and there is yet no sign it is being too slow to respond as inflation heads higher, an influential Fed governor said on Wednesday.

In a speech that shed little light on whether the U.S. central bank would move as soon as next month to tighten policy, Governor Jerome Powell said the Fed was wise to have been patient in recent years and to have kept rates low.

"But risks now seem to me to be more in balance. Going forward, I see it as appropriate to gradually tighten policy as long as the economy continues to behave roughly as expected," Powell, a permanent voter on Fed policy who is seen as a centrist, told the Forecasters Club of New York.

The Fed has raised rates once in each of the last two years. But policymakers expect to pick up the pace this year as unemployment, down to 4.8 percent, is expected to boost inflation and as President Donald Trump and the Republican-controlled Congress are expected to cut taxes and boost spending.

Median forecasts from December suggest they see roughly three rate hikes in 2017.

Powell, a Republican who with a term ending in 2028 could outlast his colleagues at the Fed Board, stressed the need for fiscal policies that encourage Americans to participate in the labour market and that invest in infrastructure.

He predicted the economy will continue "broadly along its current path" of about 2-percent growth, with unemployment falling below today's equilibrium level and remaining there "for some time." He said that was desirable and not a sign the Fed was "falling behind the curve."

He also expects inflation to reach a Fed target of 2 percent over the next couple of years.

"We appear to be close to our employment objective, and are nearing our inflation objective," Powell said, adding the U.S. economy has done better than most of its peers in the wake of the recession.

While several Fed officials have stressed in recent weeks that a mid-March rate hike is quite possible, investors have been sceptical. Interest rate futures traders see about a 22 percent chance of a move next month, down from 27 percent last week when Fed Chair Janet Yellen said a hike is likely at an upcoming meeting.

Turning to what is seen as a growing threat that Republican lawmakers will increase control and oversight of the Fed's policy decisions by tying decisions to a single mathematical policy rule, Powell repeated his opposition.

"There is no consensus that any one rule is best, let alone that it would be desirable to require the FOMC to pick and mechanically follow one rule to the exclusion of others," Powell said.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)