However, using that argument to justify holding interest rates steady as a form of stimulus has been flawed because the economy is strong enough to withstand a hike, Kelly added in an interview on "Squawk on the Street."
"I don't normally say this, but credit to Janet Yellen," he said. "She has argued that the labor force participation rate would pick up as people got used to a tight labor market. And that does seem to be happening. That's giving them more room to breath."
"[But] it's unhealthy to keep interest rates this low at this point. So the policy is wrong, and they should raise rates," Kelly argued. "They should have started awhile back."
Kelly took issue with the characterization that the government's latest jobs report was disappointing.
A weaker-than-expected 156,000 nonfarm payrolls were added last month, while the unemployment rate ticked up to 5 percent, the Labor Department said Friday morning.
But Kelly pointed out that the labor force participation rate rose by a tenth of a percentage point to 62.9 percent in September. The labor force has increased by 3 million workers over the past year.
Kelly also cited the prospects for improving earnings in his argument for a rate hike. "Earnings are bouncing. The economy is strengthening."
"I think we'll see a nice bounce in operating EPS for the S&P 500 in the third quarter, relative to the second [quarter]," he predicted. "I think we're also going to see a strong GDP number for the third quarter, somewhere in the 2.5 to 3 percent range.
The Fed's next two-day meeting concludes on Nov. 2, just six days before the presidential election.
Cleveland Fed President Loretta Mester, a policy panel voter this year, told CNBC on Friday, right after the release of the jobs data that "all meetings are on the table" for a possible rate increase, and that politics do not have any bearing on policy setting decisions.
Kelly said: "The problem is if they only raise rates once in a blue moon, then raising rates six days before the election is a political act."
"If that caused a big market sell-off, they would have an impact one way or the other on the election. And they just don't want to have anything to do with it," he continued. "For them, that's a very good reason, even if they don't say, for waiting through November."
The Fed's final meeting of the year is set for December, one year after central bankers hiked rates for the first time in more than nine years.