Fed's Quarles says gradual U.S. rate hikes 'appropriate'

One of the Federal Reserve's newest policymakers on Thursday added his voice to the majority at the U.S. central bank calling for interest rate hikes amid rising business optimism and faster growth in the world's biggest economy.

"I anticipate further gradual increases in the policy rate will be appropriate to both sustain a healthy labor market and stabilize inflation around our 2 percent objective," Fed Governor Randal Quarles said in remarks prepared for delivery to the Institute for International Monetary Affairs in Tokyo.

"The U.S. economy appears to be performing very well and, certainly, is in the best shape that it has been in since the crisis and, by many metrics, since well before the crisis," he said.

Investors have all but priced in another rate increase at the central bank's next meeting, on March 20-21, and Fed officials have signaled they expect to deliver two more rate hikes before the year is out.

Quarles' comments underscore the general consensus at the central bank for a continuation under new Fed Chair Jerome Powell of the slow monetary policy tightening that was initiated by his predecessor, Janet Yellen.

Noting a rise in business optimism, an increase in business investment, a strengthening labor market and an accelerating pace of economic growth, Quarles said the underlying fundamentals of the U.S. economy are strong.

Although inflation continues to run below the Fed's 2 percent target despite unemployment at a 17-year low of 4.1 percent, he said, "A deviation from our target of a few tenths of 1 percentage point, especially one I expect to fade, does not cause me great concern.

On top of it all, Quarles noted, the Trump administration's newly passed $1.5 trillion tax overhaul, along with other fiscal measures, "could help sustain the economy’s momentum in part by increasing demand, and also possibly by boosting the potential capacity of the economy by encouraging investment and supporting labor force participation."

Low productivity growth, caused in part by weak investment, is hampering long-term U.S. economic growth prospects and should be a critical focus for policymakers, Quarles said.

Quarles, who started his job at the Fed in October, has previously focused most of his public comments on banking and other financial regulation.

(Reporting by Leika Kihara; Writing by Ann Saphir; Editing by Leslie Adler)