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HARTFORD, Conn. (Reuters) - With little evidence the U.S. economy is rebounding after a very weak first quarter, the Federal Reserve is in no position to start raising interest rates for the first time since 2006, a top Fed official said on Monday.
"I would like to normalize (rates) as soon as possible ... but the conditions haven't been right,” Boston Fed President Eric Rosengren said, adding that there are side effects to keeping rates low for a long time. "In some sense when we start raising rates that's good news."
The Fed has said it will raise rates only once it sees further improvement in the labor market, and is reasonably confident that inflation is headed back to the Fed's 2 percent target.
But with growth in the first half of the year likely to run below the economy's potential of about 2 percent, "I do not expect to see timely improvements in the unemployment rate and sufficient progress towards the 2 percent inflation target," Rosengren said. "This, in my view, makes a compelling argument for continued patience in monetary policy."
Global risks also loom.
"I’m worried about what's happening in Europe,” Rosengren said after his speech, adding, “It would be nice if they came to a conclusion over what's happening in Greece.”
Athens and its euro zone and International Monetary Fund creditors are in talks over Greece's debt and aid money, and without a deal, Greece could soon default or go bankrupt.
“If there was a disorderly outcome in Europe it would have an impact on New England,” Rosengren said.
A slowdown in China is also a concern, he said. “The things I worry the most about are the things I can least control,” he said.
Rosengren's strongly dovish comments come as Fed policymakers prepare to meet in about two weeks to weigh a possible rate hike.
Policymakers have kept interest rates near zero since December 2008, and most, including Rosengren, have long thought they would be able to begin to lift rates this year. Even after the economy's dismal first-quarter performance, policymakers stuck to that view, attributing the slowdown to the effects of a severe winter and predicting a snapback.
So far there is little sign of such a rebound, Rosengren said.
Past tightening cycles have typically taken place against the background of much stronger growth than seen currently.
Rosengren is not a voting member this year on the U.S. central bank's monetary policy committee.
Reporting by Svea Herbst, writing by Ann Saphir; Editing by Chizu Nomiyama and Meredith Mazzilli