By Howard Schneider
BATON ROUGE (Reuters) - The economy should rebound to a roughly 3 percent annual growth after a rocky start to 2014 and put the Federal Reserve on track to raise rates later next year, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.
Lockhart, who does not currently sit on the Fed's policymaking committee, said he was "not in a rush" for the central bank to end the era of loose monetary policy and begin raising rates. Despite falling unemployment, he said there was still ample slack in labor markets, and a need for the Fed to be patient until it is clear that economic growth is sustainable and strong enough to maintain full employment.
But Lockhart also said he agreed with what has become a generally rosy consensus at the Fed about the direction of the U.S. economy. If anything, some members are becoming more concerned that the economy - and labor markets in particular - may tighten faster than expected and put the Fed in a difficult spot.
Lockhart, however, said he thought there was still doubt about the sustainability of growth, and the speed with which workers who are currently discouraged or only marginally attached to the labor force will be brought back to work.
"I feel the need to see confirming evidence in the data validating the view that above-trend growth is occurring and is sustainable, and that the FOMC (Federal Open Market Committee) is closing in on its policy objectives," before rates increase, said Lockhart, considered among the Fed's centrist members. "A combination of a shortfall from full utilization of our nation?s labor resources and inflation below the FOMC?s longer-term objective would, in my view, justify patience in raising policy rates."
He added that he did not expect "dramatic" and rapid improvement in employment data, but that steady progress would likely put the Fed in position to begin raising rates in the second half of next year.
The discussion over how to steer monetary policy into a post-crisis phase has begun in earnest. Fed members at their last meeting had explicit discussions about how and when to "normalize" monetary policy. The process will involve not only raising rates but draining some $2.5 trillion in reserves from the banking system and eventually paring its own balance sheet.
Given the extraordinary measures taken in response to the crisis, there is even debate over how best to regulate interest rates in the future, with a number of strategies under discussion.
Lockhart said he thought the process of normalization could prove tricky if the Fed is to avoid tumult in U.S. or global markets.
"This will be a significant, even historic, transition that must be executed skillfully, with tools sufficient to the task, and with clear communication that fosters orderly market adjustment, to the extent possible," Lockhart said. "The discussion of so-called policy normalization documented in the latest minutes of the FOMC was just a first step, in my opinion."
(Reporting by Howard Schneider; Editing by Lisa Shumaker)
