Fed's internal split tied to dueling views on jobs outlook

The split at the Federal Reserve over when to next raise interest rates appears to hinge largely on disagreements over the labor market outlook, comments from policymakers on Friday suggest.

When the Fed earlier this week decided to stand pat on rates, Fed Chair Janet Yellen said she felt the labor market had more room to run before it could overheat.

Three of 10 voting policymakers dissented, saying they preferred an immediate hike rather than the deferral until later in the year that most saw as appropriate.

On Friday one of the dissenters, Boston Fed chief Eric Rosengren, explained that his vote turned on his view that sharply falling unemployment could create a spike in inflation and actually trigger a recession.

"Unemployment this low may well have the desirable effect of bringing more workers into the labor force ��� but, unfortunately, only temporarily," said Rosengren. Raising rates slightly and gradually, said, could prevent overheating in the labor market and allow the recovery to continue longer than otherwise.

Two other dissenters, Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester have not comment on their decision to dissent as of Friday.

Comments from other Fed policymakers on Friday, however, underscored that a deep wedge in views on the labor market outlook is driving differences of opinion on when to raise rates.

Minneapolis Fed President Neel Kashkari, responding to questions from the public on Twitter, said he believed the labor market continues to have slack and that he wanted to see the unemployment rate, now at 4.9 percent, to come down. The bigger worry for him, he said, was that the Fed will raise rates too soon rather than too late.

The view that the labor market is not close to overheating is also central to Dallas Fed President Robert Kaplan's view that the Fed should be patient and cautious in raising rates.

"We don't think the economy is overheating," said Kaplan, who like Kashkari will rotate into a voting slot on the Fed's policy-setting panel next year. "We are not as accommodative as people would think."

The Fed will have three monthly government reports on the state of the U.S. labor market in hand before its meeting in December, when many traders and economists expect it to finally pull the trigger on a rate hike.

(Reporting by Ann Saphir in San Francisco and Lindsay Dunsmuir in Washington; Editing by Chizu Nomiyama)