Federal Reserve Governor Daniel Tarullo told CNBC on Friday he wants to see more evidence of sustained inflation before considering an interest rate increase. But he added he can't rule out a hike this year.
Tarullo, a voting member on the central bank's policymaking panel, said because of false starts on inflation, he'd like to see a rise in personal consumption expenditures closer to the Fed's 2 percent target. "We're not running a hot economy," he said.
He said the economy also has room to create jobs, when considering the unemployment rate has been rather steady while nonfarm payrolls have increased, presumably drawing on slack in the employment market. "No one knows where full employment is," he said.
"Over the last year ... the unemployment rate has remained just about stable, while we've had about a million jobs above the replacement needs," he added. "Remember our mandate is maximum employment not some constructed view of full employment."
Tarullo said investors should look at the big economic picture, not just each economic report, and that the Fed needs to look forward, not backward, when considering monetary policy.
Tarullo appeared on "Squawk on the Street" hours after Boston Fed President Eric Rosengren knocked the stock market lower by pushing the case for an interest rate hike.
In a morning speech, Rosengren said the Fed faces increasing risks if policymakers wait too much longer to increase rates for the second time in a decade.
"If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate," said Rosengren, a voter on the policymaking Federal Open Market Committee this year.
But Rosengren did not talk about timing — the pressing question for the Fed's Sept. 20-21 meeting.
Tarullo partly agreed with Rosengren, saying: "There's no question ... when rates are low for a long time that there are opportunities for frothiness and perhaps over-leverage in particular asset markets."
But Tarullo disagreed with the cause and effect laid out by Rosengren. "I do think we need to be aware of that," Tarullo argued. "But being aware of that is different from saying therefore the answer is raise rates."
The markets had pretty much ruled out a September hike after last Friday's disappointing government employment report for August, and recently weak ISM data on manufacturing and services.
But the implied odds of a rate hike nearly doubled Friday to 33 percent after Rosengren's comments, though Tarullo's more dovish remarks put the chances at 24 percent.
Before the weaker jobs data, Fed Chair Janet Yellen and Vice Chairman Stanley Fischer had suggested that a rate increase might be coming soon.
The Fed hiked rates for the first time in more than nine years in December, and traders have been mulling the next move ever since.