As the Federal Reserve considers whether to increase interest rates for the first time in nearly a decade, policymakers should look for "a little more proof than usual" that labor markets are tightening, said Jerome Powell, a central bank governor, in remarks prepared for a Wednesday speech at the Council on Foreign Relations in New York City.
"Despite slowing in March, job creation has been particularly strong over the past two years," he said. "[But] the unemployment rate probably understates the amount of slack still remaining in the labor market."
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Powell, considered a monetary centrist, expects economic conditions to support a rate hike later this year. But he stressed, "The precise timing of liftoff is less important than the path of subsequent additional rate increases."
The Fed should move gradually, he said: "If the economy improves faster or inflation increases more than expected, it will be appropriate to raise rates faster. And if economic performance disappoints or inflation remains lower than expected, it will be appropriate to delay liftoff or raise rates more slowly thereafter."
"There is no risk-free path for monetary policy," he added, citing the risk of raising rates too quickly, which could weaken the economy more than expected and force the central bank to reverse course.
On the other hand, Powell said, "Overly accommodative monetary policy also poses risks," such as an overheated economy sparking inflation concerns.
He said he's more concerned, however, about accommodative policy that could lead to "frothy financial conditions and eventually undermine financial stability."
For now, current policy "may not only help restore some of our economy's potential, but should also help return inflation to our 2 percent objective more expeditiously," said Powell, who blames low inflation on "two transient shocks," the oil collapse and the stronger dollar.
He also stressed fiscal policy changes as a path toward more economic prosperity. "To give us the best chance to recover lost ground, we need policies that support labor force participation, business and household confidence, hiring and investment, and productivity growth—policies, I hasten to add, that are, for the most part, outside the remit of the Federal Reserve."
—CNBC senior economics reporter Steve Liesman contributed to this report.