Fed's Rosengren - conditions for rate hike not yet met

LONDON (Reuters) - The U.S labour market needs to strengthen further and inflation needs to show signs of heading back up to 2 percent before the Federal Reserve will raise interest rates, a top Fed official reminded a London audience on Thursday. The Fed in March set for itself exactly those two conditions for raising rates in what will be its first round of monetary tightening in more than a decade. By sizing those goals up against the "mixed" labour data since then and a "stubbornly" low rate of inflation, Boston Federal Reserve President Eric Rosengren made it clear that he views the timing of a first rate hike as hardly imminent. "Incoming data would need to improve to fully satisfy the Committee’s two conditions for starting to raise rates," Rosengren said. "I do not think that either condition has been met." Rosengren, who does not have a vote on the Fed's policy-setting committee this year, is one of the U.S. central bank's most dovish officials. He did not say in his remarks at Chatham House in London exactly when he expects a rate hike would be appropriate. Unemployment, currently at 5.5 percent, is still above the 5 percent rate he views as consistent with full employment. Rosengren also indicated that he would support gradual rate hikes, saying increases may not need to be as steep as in the past because of what most Fed officials perceive to be a decline in the "normal" short-term borrowing rate for a healthy economy. "If the longer-run federal funds rate has declined, rates do not need to rise as much to return to 'normalized' interest rates," he said, pointing out that Fed officials now estimate the longer-run fed funds rate at between 3.5 percent and 3.75 percent, lower than the pre-crisis norm. Rosengren also said that given such lower normal long-run interest rates, central banks in developed countries may have set their inflation targets too low, making them more vulnerable to repeated bouts of near-zero interest rates. The Fed, which has kept rates near zero since December 2008, has an inflation target of 2 percent, as do several other major central banks. Rosengren also weighed in on a debate in the U.S over monetary policy rules, which he said can be helpful as benchmarks, though following them rigidly would be misguided. (Reporting by William Schomberg and Francesco Canepa, writing by Ann Saphir; Editing by Meredith Mazzilli)