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Low wages, inflation should keep Fed on hold: policymakers

The United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron (Reuters)

By Ann Saphir

(Reuters) - Slow wage growth and low inflation are prompting two top U.S. Federal Reserve officials to call for deferring interest-rate increases until next year, and a third to suggest waiting until mid-2015 or later - all despite strong U.S. jobs gains.

“If the (Fed) is to err on the side of being a little late as viewed by history writers or maybe a little early, I prefer to take the risk of being a little bit late,” Atlanta Fed President Dennis Lockhart told Bloomberg News in an interview on Friday.

U.S. employers added more jobs in December than expected, but wage growth slowed, a government report showed earlier in the day.

Lockhart, seen as a policy centrist, said the report is no reason to advance the timing of the Fed's first rate hike, which he now expects to occur in mid-2015 or later.

Chicago Federal Reserve Bank President Charles Evans, speaking with CNBC just after the jobs report, said he is sticking to his call for a rate rise in 2016.

"If we are going to get inflation up to our 2 percent objective ... we are going to have to see wages increase more," Evans said. "That's why I'm in favor of being patient on raising interest rates."

Both Evans and Lockhart have a vote on the Fed's policy-setting panel this year. Evans said he thinks inflation will still take years to return to the Fed's 2 percent target despite what he called "good, good progress" on jobs.

The Fed has kept short-term interest rates near zero since December 2008, and most central bank officials expect the economy to be strong enough this year to start raising them. Traders share that viewpoint, betting on Friday that the Fed will begin doing so in September.

Late Thursday, Minneapolis Fed President Narayana Kocherlakota called for leaving rates where they are for at least another year. Like Evans, he also cited sluggish wage growth and stubbornly low inflation, along with rising bets in financial markets that the Fed will continue to miss its inflation target.

The U.S. bond market's measures on inflation expectations fell further after the jobs report.

Bets on inflation expectations have "moved down a lot," Evans said on Friday. "That's either an assessment by investors that they are expecting continued very low, below-our-objective inflation ... or the cost of low inflation is potentially much higher than they've ever experienced before."

The Fed last month downplayed the decline in market-based measures of inflation, saying that surveys showed economists still firmly expect the Fed to be able to boost inflation back to its target.

Richmond Fed President Jeffrey Lacker, who also votes on Fed policy this year, on Friday embraced that view, calling survey measures of inflation expectations rock steady and painting a bright picture of economic growth.

Saying there is no pre-set timetable for raising rates, Lacker added that the Fed must respond quickly if the outlook for growth changes rapidly.

(With reporting by Michael Flaherty in Richmond, Va and Howard Schneider in Washington; Editing by Lisa Von Ahn, Chris Reese and Chizu Nomiyama)

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