A top U.S. Federal Reserve official said on Tuesday he thinks the time to drop the Fed's promise to hold rates low for a long time might be drawing nearer.
"A couple of months ago, I was saying I was comfortable with the extended period language," Richmond Federal Reserve Bank President Jeffrey Lacker told reporters after a speech.
"The recent data has made me think that it might be sooner rather than later that we would move that language. It depends on more data coming in," he said.
Lacker is not a voter on the Fed's interest rate setting panel this year.
The Fed lowered rates to near zero in December 2008 and began promising to keep rates exceptionally low for an extended period soon afterward. With the economy recovering gradually from a deep and damaging recession, the Fed has said it is in no hurry to tighten borrowing conditions, but many in financial markets believe that dropping the extended period pledge will be the Fed's first step in that direction.
Primary dealers polled by Reuters see a 62 percent probability of a Fed rate hike by the end of the year.
Lacker said he is not ready just yet to drop the extended period pledge, and he and other Fed officials said in speeches on Tuesday the economy is operating well below full capacity and full recovery is a way off.
"The pain is still with many of us to be sure, and we are a long way from a full recovery," Lacker told a regional Fed forum.
Lacker, known to be one of the more aggressive anti-inflation hawks among policy-makers, said there were signs of stabilization in housing markets, but overbuilding means that sector won't help lift the recovery.
He said news that employers added 162,000 jobs in March was one of the most encouraging recent signs of economic healing. However, he added that while the labor market seems to be lifting itself off the floor, rapid growth in employment this year seems unlikely.
Another Fed official said there is little inflationary pressure in the economy that is operating well below its potential.
"There are a lot of people who are unemployed, there are a lot of factories that are not producing at full steam, so we have excess slack," Dallas Fed Bank President Richard Fisher said in an interview with Fox Business Network.
Fisher is also not a voter this year on the Fed's interest-rate setting Federal Open Market Committee. Fed Chairman Ben Bernanke is scheduled to discuss the economic outlook in congressional testimony on Wednesday.
Bernanke did not talk about the economy or monetary policy in a speech on financial education on Tuesday.
On Tuesday, he said inflation remains benign, although he stressed that the risks of a sharp decline in inflation had diminished.
Some Fed officials would like to raise the discount rate, the level it charges banks for short-term loans, a Fed report showed on Tuesday. The Fed has taken pains to stress that raising the discount rate nearer to pre-crisis levels signals a normalization of lending, not a tightening of financial conditions.
Lacker said he has not decided whether the gap between the discount rate and the policy Fed funds rate should revert to a full percentage point.
Another Fed official, Fed Governor Daniel Tarullo, focused on financial regulation reform in comments that did not address the economic outlook.
Regulators should consider conducting routine, publicly disclosed "stress tests" to gauge how well big financial firms could weather a crisis, he said.
Tarullo, the central bank's point person on regulatory reform, said releasing the information would help investors make informed decisions, and encourage public scrutiny of the regulators' methods.
The Fed led stress-testing of the 19 largest U.S. financial firms last year and disclosed the results, a controversial decision even inside the central bank. The concern was that weaker banks might be harmed by the public disclosure.
