By Jonathan Spicer and Daniel Bases
NEW YORK (Reuters) - Two influential Federal Reserve officials said they could still hike U.S. interest rates in June despite weak recent economic data and skepticism among investors, putting the spotlight squarely on the economy's performance over the next two months.
Disappointing U.S. jobs growth, manufacturing activity, and retail sales over the winter had pushed market expectations for a rate hike to later in the year. June has long been seen as the earliest the Fed could tighten policy, after more than six years of near zero rates.
But on Wednesday, New York Fed President William Dudley and Fed Governor Jerome Powell sketched out scenarios in which the central bank could move earlier than many now expect, and then move cautiously.
"I could imagine circumstances where a June rate hike could still be in play," Dudley, a permanent voting member on the Fed's policy committee and a close ally of Fed Chair Janet Yellen, told a Reuters Newsmaker event in New York.
"If the economy's strong, the unemployment rate is dropping, wages are rising, and the outlook is good, you could conceivably get to that point," he said, adding "the bar is probably a little bit higher" for a June hike given recent data.
Powell said he would be willing to start tightening even at current low levels of inflation and that the central bank should proceed slowly from then on to ensure continued recovery from the 2007-2009 recession.
"You cannot wait until you see the goal posts coming because monetary policy works with these long lags," Powell told the Council on Foreign Relations, adding the Fed could move in June if economic data over the next two months indicate the recovery is on track.
"By the time of the June meeting we will have had ... a lot more incoming data on just about everything in the economy. June is a different world than today," Powell said. "I don't think we need to be in a hurry," he said, but "you have to start well before you actually hit the goal."
Even a modest rate hike in the world's largest economy would ripple through financial markets.
Futures traders, who on Tuesday predicted December was the most likely month for the tightening, on Wednesday shifted that to October, according to futures markets. Wall Street economists generally expect the Fed to move in September.
While the first hike will breach a post-crisis psychological barrier, policymakers have repeatedly noted that rates will remain near historic lows, potentially for years.
Dudley, among the most dovish of policymakers, said there were still good reasons for the Fed to err on the side of hiking rates too late, in order to make sure as many workers as possible are pulled into the labor force.
The weak first-quarter data and the sharp drop in March jobs growth means "the bar is probably a little bit higher" for a June hike, Dudley added. He predicted 1 percent growth in the first quarter due in part to harsh weather in much of the United States, but a rebound in the current quarter.
Minutes from the Fed's March policy meeting are to be published later on Wednesday.