Fed's Lockhart sees interest rate 'lift-off' by September

By Howard Schneider

ATHENS, Ga. (Reuters) - Atlanta Federal Reserve President Dennis Lockhart said on Friday he expects the U.S. central bank to raise interest rates at either its June, July or September policy meetings, barring a significant downturn in the U.S. economy.

The lower economic forecasts issued by the Fed this week reflect mostly "transient" issues that neither fundamentally change its outlook for continued U.S. growth nor are likely to push back an initial rate hike, Lockhart told reporters after a speech at a University of Georgia Law School symposium.

"I continue to believe that mid-year or a little later is appropriate timing. That would allow the June meeting to clearly be taken seriously as a meeting for the 'lift-off' decision. I would add to that July ... And, of course, September," Lockhart said.

"I can't be certain it is going to happen in those three months ... But I think it is realistic to assume that is the period in which we will be taking on this decision with a high likelihood of pulling the trigger," said Lockhart, a Fed centrist.

He could prove to be an important swing voice on issues like the progress of inflation and the strength of labor markets, and has consistently said he wanted more evidence that the economic recovery would continue before committing to a rate increase.

On Wednesday, the Fed moved a step closer to hiking rates for the first time since 2006, but downgraded its economic growth and inflation projections, signaling it is in no rush to push borrowing costs to more normal levels.

Lockhart's comments on Friday, in which he highlighted the "accumulated progress" of the U.S. economic recovery, put a firmer timeline on his view of the Fed's rate lift-off decision.

He also said the unexpectedly larger fallout from the soaring U.S. dollar had given him pause about the pace of the recovery, though he added that he remains convinced the economy will stay above trend for the next couple of years.

"The economy is throwing off mixed signals," Lockhart said, noting that job growth was still strong, but "quite a number of elements of weakness" were apparent in terms of inflation, exports, manufacturing and housing.

"The impact of the strong dollar first on softening the inflation numbers ... and its effect in the first quarter on manufacturing activity ... has gotten the attention of me and, I believe, my colleagues," Lockhart said.

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But the collective outlook of the Fed's policy-setting committee "continues to be one of above-trend growth in the medium-term ... this is not reflecting a dramatic turn in the economy for the worse," he said.