Economic weakness in the first quarter shows the U.S. isn't ready for an interest-rate increase, said Eric Rosengren, president of the Federal Reserve Bank of Boston.

Rosengren called the March jobs report “disappointing” and said inflation remains “stubbornly below” the central bank's 2 percent target.

“Incoming data would need to improve to fully satisfy the committee's two conditions for starting to raise rates,” Rosengren, who doesn't vote this year on the Fed's policy-making panel, said in the text of a speech Thursday in London.

The Federal Open Market Committee (FOMC) said after its March meeting that it would wait for further improvement in the labor market and signs that inflation will move back toward 2 percent before increasing its benchmark federal funds rate for the first time in almost a decade.

A Fed report released Wednesday in Washington showed the economy grew at a “modest” or “moderate” pace in eight of the central bank's 12 districts.

Employers added 126,000 jobs in March, the smallest gain since December 2013. The unemployment rate was unchanged at 5.5 percent.

Rosengren, 57, focused much of his remarks on the implications of changes to the FOMC's forecasts for long-term interest rates. The midpoint for the panel's long-run estimate of the federal funds rate fell to 3.75 percent in March, from 4.25 percent in June 2012.

Rate Path

Rosengren said that drop is one reason why the path of interest-rate increases after liftoff may not need to follow as steep a course as in previous recoveries. Most officials forecast the Fed will start to raise rates this year.

He also argued that a lower long-run rate may justify setting a higher inflation goal to help avoid returning to near-zero rates when the economy slows again.

“A higher inflation target would mean a higher longer-run policy rate, which brings with it a lower chance of hitting the zero lower bound,” he said.

Rosengren added that Fed policy makers had also lowered their estimate of long-run unemployment. The central tendency of the panel's forecasts—which eliminates the highest three and lowest three—dropped in March to a range of 5.0 percent to 5.2 percent. It had been 5.2 percent to 6 percent in June 2012.

“The absence of wage and price pressure is consistent with some slack still remaining in the labor markets, even with an unemployment rate that has fallen to 5.5 percent,” he said. He said his own estimate of the long-run rate is 5 percent.

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Rate Rise Still on the Horizon

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