Fed's Rosengren Says Economy Needs 'Modest, Gradual Tightening Now'

Boston Federal Reserve President Eric Rosengren said on Friday that he believed interest rates should be raised gradually now and warned that a fall in the unemployment rate below its sustainable level could derail economic recovery in the United States.

"By 2019, I expect the unemployment rate to have declined below 4.5 percent. While I have a long track record of advocating for policy that supports robust labor market conditions, that is below the rate that I believe is sustainable in the long run," Rosengren said in a statement.

Rosengren dissented at this week's Federal Reserve rate- setting meeting that left interest rates unchanged at a range of 0.25 to 0.50 percent.

Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester also dissented, saying they favored raising rates this week.

Neither has yet commented publicly on their reasons. It was the first time since December 2014 that three Fed officials have dissented although George has run against the grain at four of the past five Fed policy meetings.

In his statement, Rosengren said such a low unemployment rate risked overheating the economy, putting upward pressure on inflation and increasing financial-market imbalances, which could ultimately lead to recession.

The U.S. jobless rate currently stands at 4.9 percent.

Rosengren has previously warned about the rapid rise of commercial real estate prices in the United States, which he argues could deepen a downturn if the U.S. economy is hit by a negative shock.

He has also said the United States can withstand a rate increase given its resilience when faced with headwinds from abroad earlier this year such as the slowdown in China and Britain's vote to leave the European Union.

The Federal Reserve raised interest rates for the first time in a decade last December but has since stood pat. On Wednesday, it again held off and said it wanted to see some further improvement in the labor market and inflation. However, Chair Janet Yellen signaled the central bank still expected one hike this year, with traders betting on December.

(Writing by David Chance and Lindsay Dunsmuir; Editing by Chizu Nomiyama and Andrea Ricci)