By Howard Schneider
BOSTON (Reuters) - Boston Federal Reserve President Eric Rosengren said on Friday that investors were probably right in placing "very high" odds on a U.S. interest rate increase in December, a step he argues is already overdue.
Rosengren wanted to raise rates in September and remains concerned that if the Fed stays on hold too long it will have to tighten monetary policy faster in the future and possibly put the economic recovery at risk.
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The regional Fed official said in an interview with CNBC that he was "concerned about overshooting what is a sustainable employment rate," and being forced to ramp up rate increases in a damaging way if prices begin to escalate.
"The market seems to think that there's a very high probability of December. We'll see how the economic data actually comes in, but I think that is priced appropriately," Rosengren said.
Futures traders give about a 60 percent chance of a rate rise in mid-December when the Fed holds its final policy meeting of the year, and only an 8 percent chance for a move in early November, when the Fed also will hold a meeting.
Rosengren's comments came as he opened a two-ay conference on economics that will include a lunch address by Fed Chair Janet Yellen.
The focus is on why the country's seven-year recovery has been so weak. In prepared opening remarks he said the "nonconformist" behavior of the economy remains a challenge for policymakers trying to determine whether low growth and low inflation are now a permanent state of affairs.
Coupled with things like a high saving rate and lower labor force participation, it could mean the country's economic performance has changed for good.
Policymakers are trying to determine "whether firms and households have changed behavior in ways that are likely to be more permanent than transitory, whether slow growth in productivity is transitory or permanent, and whether recent trends in personal saving behavior are likely to persist well into the future," Rosengren said.
The answers will shape whether officials at the Fed and other central banks can expect a gradual return to higher interest rates, higher growth and more normal monetary policy, or whether central banks will have to keep nontraditional tools in hand and be prepared "to address any emerging risks to the current recovery."
The fact that 10 year Treasury yields remain near or below zero on an inflation-adjusted basis, Rosengren said, "suggests a lack of confidence in U.S. and global growth prospects, and in the ability of policy authorities to offset weak growth."
(Reporting by Howard Schneider, additional reporting by Jonathan Spicer in New York; Editing by Chizu Nomiyama)