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Fed rate liftoff on track but inflation, wages a worry: Lockhart

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."

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.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta.
Scott Eelis | Bloomberg | Getty Images
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta.

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.

"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.

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"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.Last month, Lockhart said the U.S. economy "is hitting on all cylinders," likely putting the Federal Reserve in position to raise interest rates by the middle of the year, according to Reuters.

Traders currently see a 49 percent chance that the central bank will hike rates in July, according to CME FedWatch, which tracks the movement of futures contracts tied to the federal funds rate.

The majority, about 65 percent, expect the first hike to occur in September.

The Fed has kept benchmark interest rates close to zero since 2008. At it's January policy meeting, the central bank vowed to remain "patient" on boosting rates said economic activity had increased "at a solid pace" since its last meeting.

In the past, Fed Chair Janet Yellen has defined patient as a vow to keep rates unchanged for at least the next two meetings.