By Howard Schneider and Lindsay Dunsmuir
WASHINGTON (Reuters) - The U.S. Federal Reserve on Thursday continued to lay the groundwork for an interest rate increase in the next two months, with a senior policymaker saying the economy will likely be ready for such a move "fairly soon."
Federal Reserve Governor Jerome Powell, a voting member of the U.S. central bank's rate-setting committee, said in a speech in Washington that he felt the economy was on a "solid footing" and within reach of the Fed's inflation and employment goals.
But he added that the uncertainty surrounding Britain's June 23 referendum on whether to leave the European Union was an argument in favor of the Fed exercising "caution" as it ponders whether to raise rates at its June 14-15 policy meeting.
The Fed will hold another policy meeting on July 26-27.
Powell, however, struck an overall positive tone about the U.S. economy in an appearance at the Peterson Institute for International Economics, becoming the latest Fed policymaker in recent days to say it may be time to notch rates higher.
The Fed's Washington-based Board of Governors has a decisive role in setting monetary policy, and its members have a permanent vote on the committee that sets the central bank's key federal funds rate.
Powell said he felt that data showing continued job creation and evidence of rising wages were a more important signal about the economy's direction than recent weakness in consumer spending and business investment.
"There are good reasons to think that underlying growth is stronger than these recent readings suggest," Powell said. "If incoming data support these expectations, I would see it as appropriate to continue to gradually raise the federal funds rate."
WANING GLOBAL RISKS
Powell spoke a day before a scheduled public appearance by Fed Chair Janet Yellen. Yellen's remarks on Friday as well as those in a speech in early June will be closely parsed for clues about the Fed's monetary policy stance going into the June meeting.
After increasing rates in December for the first time in a decade, the Fed has watched tentatively as global markets seesawed and weak growth in China, Japan and Europe threatened to pull the U.S. recovery off track.
But the Fed now regards those risks as "waning," and the minutes from its April policy meeting showed several policymakers keying in on a possible June rate increase.
That has shifted market expectations that had been discounting higher rates until later in the year, with trading in federal funds futures on Thursday implying a 26 percent chance of an increase next month and 56 percent in July.
David Stockton, the Fed's former research director, said on Thursday he felt the only thing holding the central bank back from raising rates in June was the "Brexit" vote.
Though Fed policymakers, including Powell on Thursday, have said they see little broad systemic risk in a British departure from the EU, they still regard it as an international risk at a time when the U.S. economy has been weighed down by poor global demand and a rising dollar.
"Brexit is likely to stay their hand" in June, Stockton said, but "they are on track" for July.
(Reporting by Howard Schneider and Linday Dunsmuir; Editing by Paul Simao)