Fed needs to see prices rise before next rate hike, Evans says

GRAND RAPIDS, Mich. (Reuters) - The Federal Reserve should wait until there are clear signs that American paychecks and prices are rising before raising interest rates again, a U.S. central banker said Monday, warning that moving too fast would be a policy "misstep."

Chicago Federal Reserve Bank President Charles Evans, who votes this year on monetary policy, said he broadly agrees with his colleagues who believe rates should rise gradually to about 2.7 percent over the next two years or so, from the current range of between 1 percent and 1.25 percent.

But he said inflation, running at 1.4 percent by the Fed's preferred gauge, is too low, and voiced concerns that low inflation expectations will keep it from rising toward the Fed's 2-percent inflation goal.

"We need to see clear signs of building wage and price pressures before taking the next step in removing accommodation," Chicago Federal Reserve Bank President Charles Evans said in remarks prepared for delivery to the Economic Club of Grand Rapids. "A gradual and cautious approach continues to be the appropriate strategy."

His comments stood in stark contrast to the confident tone adopted by William Dudley, chief of the New York Fed, who earlier Monday said inflation weakness is fading.

The Fed has raised interest rates twice this year, and last week policymakers pointed to one more rate hike this year and three next year. Fed Chair Janet Yellen said such increases are justified by improvements in the labor market and the conviction that inflation will return to 2 percent by 2019.

Evans said he is less optimistic about inflation. Returning inflation to 2-percent over the medium term, he said, calls for policies that generate at least the possibility inflation could exceed 2 percent.

"We should avoid taking policy steps that could be misread as a lack of concern over the inflation outlook," said Evans. "In my view, that would be a policy misstep that would further delay achieving our inflation objective."

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)