May be 'well into' 2016 before rate hike justified: Fed's Evans

CHICAGO (Reuters) - It could be "well into" next year before inflation has enough upward momentum to justify raising U.S. interest rates, a top Federal Reserve official said on Thursday, adding that rate increases thereafter should be very gradual.

"The outlook for inflation remains too low," Chicago Fed President Charles Evans said in remarks prepared for delivery to a Manufactured Housing Institute forum in Chicago. "A gradual path of normalization would balance both the various risks to my projections for the economy's most likely path and the costs that would be involved in mitigating those risks."

Evans is one of a handful of Fed policymakers who believe the central bank should not raise rates next month, even as economists largely believe it will and traders are pricing in a 70 percent chance of a hike.

Unemployment has fallen to 5 percent, half its peak during the 2007-2009 recession and just above what most agree is probably the minimum level before inflation pressures begin to build. But with low oil prices and a strong dollar putting downward pressure on prices, Evans expects inflation to still be below the Fed's 2 percent target even by the end of 2018.

The Fed's Dec. 15-16 meeting will be Evans' last chance to vote on the central bank's policy-setting committee before he rotates into a non-voting position for 2016, replaced by the more hawkish Cleveland Fed President Loretta Mester.

It remains unclear whether Evans would use his vote to protest a rate hike next month. The Fed has kept its benchmark overnight lending rate at near zero since December 2008.

He repeated on Thursday he is more focused on making sure the pace of rate hikes overall is slow than on the exact timing of the initial hike, saying it could be appropriate for the Fed's key interest rate to still be under 1 percent at the end of 2016.

That's a shallower rate hike path than seen by many of his colleagues, suggesting that the next big debate within the Fed after a rate hike will revolve around the pace of monetary policy tightening.

(Reporting by Ann Saphir; Editing by Paul Simao)

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