William C. Dudley, president of the Federal Reserve Bank of New York, said that with inflation running low and the labor market still healing, "it still is premature to begin to raise interest rates."
"All that said, I hope the economic outlook evolves so that it will be appropriate to begin to raise interest rates sometime next year," Dudley said in a speech to the Central Bank of the United Arab Emirates in Abu Dhabi.
The Fed's benchmark short-term interest rate has been near zero percent since late 2008 in an effort to stimulate economic growth.
But as the recovery from the Great Recession continues and the unemployment rate continues to fall -- it was down to a six-year low of 5.8% in October -- pressure is growing on Fed policymakers to start raising rates to avoid the risk of high inflation.
FOR THE RECORD
2:17 p.m.: An earlier version of this post said the recovery from the Great Depression was continuing. It is the recovery from the Great Recession.
This post was first published at 5:17 a.m.
Dudley is a close ally of Fed Chair Janet L. Yellen, and as vice chairman of the policymaking Federal Open Market Committee, he's an influential voice at the central bank.
The Fed last month took a major step in returning to a more normal monetary policy, ending its latest version of a controversial bond-buying stimulus program that had run off-and-on for much of the last six years.
In its official policy statement last month, the Federal Open Market Committee said it planned to keep rates near zero percent for "a considerable time."
Fed officials are particularly concerned about the low annual inflation rate of about 1.7%, which is below the central bank's 2% target.
They also want to manage the expectations of investors to avoid roiling financial markets. The rock-bottom interest rates have been a boon to stocks, helping push the Dow Jones industrial average to record highs.
Dudley said a raise in Fed interest rates would be an important milestone in the recovery, but he cautioned against rushing into it.
"While raising interest rates is often portrayed as a difficult task for central bankers, in fact, given the events since the onset of the financial crisis, it would be a development to be truly excited about," he said Thursday.
"Raising interest rates would signal that the U.S. economy is finally getting healthier, and that the Fed is getting closer to achieving its dual mandate objectives of maximum employment and price stability," Dudley said. "That would be very good news, even if it were to cause a bump or two in financial markets."