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Fed's Mester renews call for U.S. rate hike

Cleveland Federal Reserve President and CEO Loretta Mester gives her keynote address at the 2014 Financial Stability Conference in Washington December 5, 2014. REUTERS/Gary Cameron

NEW YORK (Reuters) - The Federal Reserve should begin to hike rates because the U.S. economy has virtually reached full employment and inflation is gradually rebounding, a top Fed official said on Thursday.

Repeating a message she has delivered for months, Cleveland Fed President Loretta Mester said delaying the long-anticipated policy tightening only risks having to hike rates aggressively down the line.

Mester, who also said she recently edged down her prediction for "neutral" long-run interest rates, is in the hawkish minority at the U.S. central bank. The majority of Fed officials want to hike later this year, with some dovish officials preferring to wait until 2016 given a slowdown overseas.

"I believe the economy can handle an increase in the fed funds rate and that it is appropriate for monetary policy to take a step back from the emergency measure of zero interest rates," Mester, who regains a vote on the Fed's policy-setting committee next year under a rotating system, said at New York University.

The Fed's preferred inflation measure is at 1.3 percent, below a 2-percent target, which it has been for more than three years. Unemployment has fallen to 5.1 percent, down from a crisis-era high of 10 percent in 2009.

Mester said the economy is "at or nearly at full employment," adding that a small rate rise "is not tight monetary policy."

A gradual approach, she said, "will allow us to recalibrate policy over time as some of the uncertainties surrounding the underlying economy in the post-crisis world, like the longer-run economic growth rate, are resolved."

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)